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Turkey’s CBRT has hiked the repo rate by 200bps to 10.25%. The USD/TRY had an immediate kneejerk lower but half of the TRY gains were pared back in a matter of minutes. Whether the lira appreciates more in the coming days or not, depends on the consequences of the rate decision. In fact, economists at TD Securities now have more questions than answers.

Key quotes

“The CBRT tightened the repo rate (and likely the whole corridor) by 200bps to 10.25%. This is more than our +75bps forecast, but highlights that the direction of our call was correct against the almost unanimous consensus for a hold.”

“The performance of the Turkish lira is not referred to explicitly in the text. The CBRT only alludes to a weaker lira when it generically says that ‘as a result of fast economic recovery with strong credit momentum, and financial market developments, inflation followed a higher-than-envisaged path.’ We must conclude that ‘financial markets’ is an elegant way to refer to a disastrously weak lira.”

“But the problem with using unorthodox measures, as the CBRT is doing right now, is that not everything appears clear as it should. So, for instance, has the CBRT really shifted the whole corridor up by 200bps? We have seen no official communication of this so far, even though it is a logical and sensible thing to do.”

“But even if we clear this doubt, what will happen to CBRT funding in the coming days? If the CBRT decides to revert all funding activity to the repo rate, which now stands at 10.25% so below yesterday’s WACF at 10.65%, the CBRT will have eased by 40bps, not tightened by 200bps. Will the CBRT decide instead to recalibrate its facilities so that the new WACF will end up at around 10.65% as is now? If so, today’s decision would be tantamount to a hold.”

“Will the CBRT provide funding at the same conditions as yesterday, in which case the WACF will shoot up to 12.65% in just a few days? Well, in this case, we will be talking of real tightening.”