The CBRT hiked the Non-PD lending rate by +425bp to 12.00%, significantly above our (+150bp) and consensus expectations (+225bp). The Bank also hiked the borrowing rate (+450bp) and the 1-week repo rate (+550bp) such that its interest rate corridor now is symmetric (+/- 2%) around the 1-week repo rate at 10.00%. This marks a first step towards a more conventional monetary policy framework, in our view.The CBRT stated that liquidity "… will be provided primarily from one-week repo rate instead of the marginal funding rate in the forthcoming period". This implies that the effective rate hike is 225bp (to 10.00%; the 1-week repo rate), as the Non-PD lending rate was 7.75% prior to the announcement. But the Bank now has the option to tighten monetary policy by an additional 200bp on extraordinary days (to 12.00%; the lending rate).
We have recently argued that a clear and decisive tightening in monetary policy was necessary in order to stabilize the TRY and anchor inflation and inflation expectations (see CEEMEA Economics Analyst No 14/02, "Turkey: The CBRT at a cross-roads – a policy shift is now necessary". Today's announcement was exactly what we have been looking for and should be TRY supportive in the near term as short-term risks are likely to be contained (and there may be downside risks to our 3-month US$/TRY forecast at 2.20). Over the longer-term, however, there could potentially be need for a stronger monetary adjustment, as the fed normalizes monetary policy.
Today's rate hikes also increase the downside risks to our (below-consensus) 2% growth forecast for 2014, and the current account may adjust at a faster pace than we originally had anticipated. Finally, the decision should be credit supportive, as it greatly reduces the risks associated with FX balance sheet pressures.