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Chris Turner, Global Head of Strategy at ING, explains that the CBT has surprised the market with an aggressive 300bp hike in the Late Liquidity Window (LLW) taking the LLW rate to 16.50%.

Key Quotes

“Most liquidity is provided through that window currently, such that the effective cost of funding should also rise by around 300bp.”

“In fairness, the market had been expecting this (albeit a smaller) move several weeks ago and the delay has probably caused the CBT to deliver a larger hike. Clearly, external conditions have also deteriorated over recent weeks, with Turkey suffering from: i)  the stronger dollar and higher US interest rates  impacting the FX borrowing costs of corporates and ii) higher energy costs  exposing Turkish energy dependencies.”

“The timing of yesterday’s move comes on the back of the near free-fall in the Lira, initially in Tokyo as Japanese retail traders exited and then through Europe when no policy response  was forthcoming.”

“Some would argue that’s not enough for an economy running a 5% current account deficit and the exposure to FX borrowing and energy as highlighted above. We would say at least this shows policymakers are prepared to act decisively and that  there is  a limit to CBT tolerance of TRY weakness.”

“Were the external environment to improve somewhat – e.g. were momentum to build behind a possible OPEC output increase in June – we think today’s move should deliver more orderly conditions to the TRY market.”