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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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