According to Cristian Maggio, Head of Emerging Markets Strategy at TD Securities, the CBRT has thrown a large stone in an (almost) quiet pond by hiking the repo rate to 24.00% from 17.75%.
Key Quotes
“This is a 625bps increase. That said, tightening is a still aggressive but smaller 425bps as today’s measure increases the Average Weighted Cost of Funding (WACF) from 19.25% to 24%.”
“Why is this the case?
Because the CBRT has been funding banks at the Overnight Lending rate of 19.25% since 17 August. By increasing the repo rate to 24% and, simultaneously, returning to providing funding “at the 1-week repo rate from September 14” the CBRT has de facto increased the rate from 19.25% to 24% – still a very aggressive move, but 200bps lower than it would optically look.”
This has also provided an initial strong support for the currency, with USDTRY dropping about 6% to 6.0168, before rebounding and stabilizing at the time of writing, at around 6.1930 (USDTRY ca. 3.5% lower).”
“The decision came in surprising for our +275bps forecast for the WACF, but our medium term projections still see the WACF moving to 30% by January 2019.”
“This is because inflation, that will soon breach the 20% mark (CPI at 17.9% in July), already requires rates between 26.5% and 27.5% based on a simple Taylor rule framework.”
“The front-end of the TRY curve had experienced brief periods of extreme tightness (higher than today’s) in August when the CBRT squeezed liquidity out of the market. Even then, USDTRY found a fairly hard floor between 5.75 and 6.00. It seems like the upper-end of this range is holding up today too.”
“If the market is not too satisfied about the CBRT action in the coming periods, it is not unthinkable to see USDTRY swinging up again at some point – perhaps earlier than one could expect – and force the CBRT to move closer to the 30% mark that we think represents a closer equilibrium threshold for now.”
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