>>> What to expect when you are expecting rate cuts from the CBT?
* Although the majority of analysts had expected the CBT to be patient and keep rates unchanged at the January MPC meeting, the Bank surprised the markets and reduced its one-week repo rate by a relatively sizable 50 bps to 7.75%. The subsequent sharp depreciation of the lira, however, has complicated the CBT’s widely expected easing cycle, which is underpinned by the likely cyclical improvements in the current account balance and inflation this year. The markets are now pondering whether the CBT will shrug off the marked underperformance of the lira since the second half of January and cut rates.
* Against this backdrop, the objective of this note is twofold. First, to reiterate the challenges faced by the CBT as a reality check. Second, to shed some light on the nature and the magnitude of the CBT’s likely policy actions by taking cues from the CBT’s previous rate cuts and the prevailing domestic/global backdrop during past easing cycles.
* When we compare current conditions with the prevailing backdrop during previous easing episodes, we observe that: (i) Turkey-specific risks now seem to be higher (Figures 16 through 18); (ii) the current backdrop seems to be less favourable in terms of inflows into bonds and equities (Figure 19); (iii) the interbank o/n rate has tended to be close to the CBT's one-week repo rate during the CBT's past easing cycles, which doesn't seem to be the case now (Figure 20); (iv) in contrast to previous easing episodes, the interbank o/n rate is very close to the upper band, suggesting the CBT’s ability to cut the upper band — without hurting the lira — is limited.
* Moreover, a careful analysis of the CBT’s press releases on interest rates leads us to believe that the CBT has been trying to prepare markets for the likely easing cycle since September 2014 (Figures 26 through 28). In this respect, we believe that the increased references to “inflation” in the interest rate statements demonstrate the CBT’s determination to emphasize the likely base-effect-driven disinflation process, which is widely viewed as one the key underpinnings of the likely easing cycle
* In light of our findings, we have become more concerned about the negative
repercussions of monetary policy easing — reductions in the upper band in
particular — which could undermine the CBT’s ability to ease as much as we
penciled into our base case for this year. Regarding the next MPC meeting on
February 24th, we look for a 50bp cut in the one-week repo rate (60% probability).
However, we see more uncertainty about the upper band, and we assign a 45%
probability (compared with 60% before) to a 25bp reduction.