Turkey: the CBRT delivers a surprise

Making up a significant political statement the CBRT just announced a 625bp rise of its key rate, taking the one-week repo rate to 24% from its previous level of 17.75 % . Well above market expectations, and just a few minutes after President Erdogan spoke openly about his own views on monetary policies –praising rates cuts that fueled nervousness ahead of the CBRT announcement - the monetary committee did not deceive this time. With the magnitude of the hike, and the statements that accompanied the announcement, the CBRT is openly showing signs on their will to fight inflationary pressures and to stabilize the TRY by embarking in a rate tightening cycle. Markets responded positively to the announcement: the TRY strengthened posting gains up to 5.3% to 6.03 vs. USD , its highest level in a month. Borsa Istabul banking Index was up as much as 5% whilst 5yCDS tightened by 43p to stand at 465pts. The positive effect of the annou ncement reached the broad EM markets spectrum. CBRT Governor Murat Cetinkaya clearly defied President Erdogan calls for a rate cut, a decision that can be seen as a first step towards the regain of autonomy of the MPC, a positive str uctural change if turns to be long-lasting . The CBRT MPC board said that further tightening would be delivered if needed, with the current stance to be maintained until the inflation outlook shows a significant improvement. They also referred to the use of “all available instruments” to pursue their objective of tackling inflation (which stood at a 15 year high of 18% as of Aug) . The big question concerning today’s decision was not only about a rate announcement, but a sign on the political stance the Turkish government will be willing to embark to in its attempt to deal with the country’s fragile fundamental macroeconomic situation, the steady pressure on the TRY and the rapid upsurge in inflation. It was also about a choice between a populist political project and the urgency to redress the current fragile macroeconomic picture – although they may imply a political cost for Erdogan’s popularity. This decision may finally represent an inflection point in the economic policy the Turkish government has implemented so far. Still, optimism should be moderate, for the macroeconomic fundamentals remain very weak. In addition, uncertainty in the political front and regarding the current dispute with the US will remain in place over the coming months . From a global perspective, this decision will help in easing tensions across emerging markets in the short term.