The CBRT maintains policy rate at 50%.
In its May MPC meeting, the CBRT kept the policy rate unchanged at 50%, in line with expectations, just as it did last month.
The CBRT continues to keep the door open for further rate hikes. The accompanying statement is very similar to last month’s statement and completely in line with our expectations. Specifically, the CBRT remains highly attentive to inflation risks and maintains the “monetary policy stance will be tightened in case of a significant and persistent deterioration in inflation” expression. As such, we believe that the CBRT continues to leave the door open for further rate hikes.
The measures implemented for Turkish Lira sterilization were more significant than the rate decision.
In the context of today’s MPC meeting, more important than the rate decision were the likely steps to be taken by the CBRT to sterilize excess TL liquidity. For instance, as of yesterday, excess liquidity in the system, monitored through open market operations, (OMO) exceeded TL500bn. Consequently, O/N repo and interbank rates have declined to 47% levels from around 53% at end-April. The CBRT’s accompanying statement initially included a commitment to sterilize the excess TL liquidity by saying that “the excess liquidity stemming from the surging domestic and foreign demand for Turkish lira financial assets will be sterilized through additional measures.”
This was followed by various steps to mop up excess TL liquidity, among others to constrain FX loans. To address the excess liquidity, the CBRT raised reserve requirement (RR) ratios for TRY deposits and FX protected accounts across all maturities. More specifically, RR ratio applied to TL deposits and KKM accounts have been increased from 8% to 12% on short term TL deposits (up to 6-month maturity), from 0 to 8% on long-term TL deposits (longer than 6-month maturity), from 25% to 30% on short term KKM and from 10% to 22% on long term KKM.
Another significant measure was the imposition of a monthly 2% growth limit on foreign currency loans, with any excess subject to RR blockage for one year. Note that the rising TL funding costs has led firms to focus on FX borrowing, which led FX loans to increase by +6% MoM and +15% YTD. Hence, the CBRT’s decision to limit FX loans is reasonable to us and aims to constrain growth, as well as avoid potential financial risks going forward. Additionally, the CBRT announced various regulations regarding conversion targets from FX-protected accounts to TL deposits.
Sustained interest in TL assets may lead to ongoing excess TL liquidity (at the short term).
The RR hikes for TL deposits will withdraw a significant amount of liquidity from the system. Yet, in the meantime, interest in TL assets (both from non-residents and locals) remains robust. According to data released by the CBRT today, the CBRT’s net reserves excluding swaps, which was -USD65.5bn as of end-March improved further by USD9bn last week (week of May 17), reaching -USD14.8bn. Based on this week’s three-day data on the analytical balance sheet and the CBRT’s swap position, we estimate an additional USD7bn improvement. In summary, the sustained interest in TRY assets may lead to ongoing excess TL liquidity at the short term. This could necessitate further RR increases or longer-term sterilization instruments. That said, should the CBRT refrain from currency purchases, we might observe increasing downward pressure on the exchange rate.
By Serkan Gonencler, Chief Economist, Gedik Investment
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