Turkey: CBRT announcement to carry uncertainties - TDS

In view of Cristian Maggio, head of emerging markets strategy at TD Securities, tomorrow, the first CBRT announcement of 2019 carries uncertainties about the direction of interest rates in Turkey.

Key Quotes

“The market has developed an expectation that rates will be lowered aggressively. The start of easing is expected for the 6 March meeting (approximately -170bps in the prices). The reasoning is that the CBRT will have to bend to presidential pressure for looser policy ahead of the 31 March local elections. Rate cuts - so the logic goes - should be delivered ahead of the vote and be perceived in the real economy by then. This would require an early move, possibly even in January, and one with sizeable effects. The later the CBRT acts, the larger the cut that will be required to be felt in the economy before the vote.”

“We think any attempt to cut rates tomorrow would reinforce the upside USDTRY momentum, which is already in the making as we explained, and potentially defeat the goal of lowering rates before the elections. If the CBRT eases rates now, or cuts too early even at a later moment, the lira reaction may be too adverse to contain with any measure but by undoing such cuts. It may, perhaps, be necessary to add even more tightness than current.”

“But if the CBRT does really cut tomorrow, or feels confident enough to provide distinctly dovish forward guidance, we think the market response will be adverse and force TRY weaker, even though the front-end of the curve may adjust initially lower. Needless to say we believe this would be a serious policy mistake that will eventually reload the bust phase of Turkey's all too recurrent boom-and-bust cycles.”