Hike Can't Hide Economic And Political Fragility
The Central Bank of Turkey (CBRT) exceeded consensus expectations with a 425-550 basis point (bps) hike to its interest rate corridor at an emergency monetary policy committee meeting on January 28. While this will stem the lira's underperformance for now, the external environment for Turkey will remain challenging as slowing growth, elevated political instability and rising US yields continue to weigh on demand for lira-denominated assets.
Rate Decision Not Quite As Bold As It Seems
The CBRT hiked its overnight lending rate from 7.75% to 12.00%, its one week repo rate from 4.50% to 10.00%, and its deposit rate from 3.50% to 8.00%. Crucially, it has signalled that the one-week repo rate of 10.00% will now be the primary funding mechanism of the banking sector, whereas before it was the overnight lending rate of 7.75%. As such, from the perspective of banks the effective rate hike can more accurately be interpreted to be in the range of 225-300 bps, based on the likely increase in the weighted average cost of funding that the CBRT provides to the sector (see chart).
|Turkey - Weighted Average Cost Of CBRT Funding To Banking Sector, %|