Turkey: Central bank to maintain rates at 14.00% with hikes likely to come in 2022 – MUFG

At this week meeting, the Central Bank of the Republic of Turkey (CBRT) is expected to maintain the key interest rate at 14.00% following a 500bp cut since September 2021. Analysts at MUFG Bank, expect the CBRT to reluctantly reverse course and hike rates by 600bp in 2022.

Key Quotes:

“The Central Bank of Turkey (CBRT) is expected to maintain rates at 14.00% (MUFG and consensus expectations are aligned) this week. A clear distinction is warranted between what the CBRT should and will do. With a policy rate at 14% and an inflation rate of 36.1%, a significantly tighter stance is necessary to anchor expectations and strengthen price stability. That is what we and broader markets believe the CBRT should do. However, the authorities resoluteness in keeping policy rates lows with their willingness to introduce heterodox measures in an effort to limit TRY volatility arising from exceptionally loose monetary policy, is what the CBRT will likely continue doing.”

“From a monetary policy perspective, our base case is that the CBRT will change course and tighten policy this year, but do so reluctantly by raising rates from a trough of 14% to 20% by end-2022. This will be akin to 2018 (sharp recessions) and late 2020/early 2021 (soft landing) when the CBRT reacted to stymie Lira volatility by raising rates sharply.”

“Our conviction behind our narrative is that with real policy rates that are acutely negative (-22%), the current monetary policy stance is unambiguously unsustainable and the pressure on the TRY is likely to continue in the absence of a policy U-turn. Whilst our core scenario is that the policy adjustment will be in an orthodox fashion, we acknowledge that unorthodox measures could materialise.”

“We view that a U-turn on monetary policy is necessary to bring stability to the currency (even though we forecast that such a 600bp hike in base case will still not be suffice to reduce inflation towards signal digits this year).”