CBRT remains on hold but sounds more dovish than before

As widely expected, the CBRT kept its policy rate unchanged at 19.0%. Again as expected, the tone of the interest rate announcement note was more dovish as compared to last month. There were important changes in the note:

1) The CBRT no longer states that “the tight monetary policy stance will be maintained decisively for an extended period until strong indicators point to a permanent fall in inflation”;

2) The CBRT has also omitted the pledge to deliver “additional monetary tightening if needed”;

3) instead the main policy guidance sentence states that “the policy rate will continue to be determined at a level above inflation to maintain a strong disinflationary effect until strong indicators point to a permanent fall in inflation and the medium-term 5 percent target is reached.”;

4) Finally, the CBRT has added a new sentence saying that the MPC would “continue to take its decisions in a transparent, predictable and data-driven framework.”

The first two changes clearly point to a less stringent commitment to price stability and hence a more dovish policy stance. The change in the main policy guidance sentence has also increased policy uncertainty. The MPC states that the policy rate will be higher than inflation, there is no guidance on the magnitude of the real interest rate that will be offered.

Also, it remains to be clarified whether the CBRT is talking about ex-post or ex-ante inflation. The CBRT is currently providing a decent real interest rate – one that is reasonably high in a historic perspective and any premature reduction in the real rates could make investors nervous. The last change is somewhat reassuring as it implies that the CBRT will be monitoring the market expectations and is unlikely to surprise the markets.

All in all, there was not a major surprise in the MPC decision and we keep our monetary policy call unchanged. We still have our first rate cut of 100bp in September and expect a cumulative 300bp in cuts until year-end. Given the worsening in inflation dynamics, and in the midst of tightening global financial conditions, which could well turn disruptive, any premature easing or reference to that could undermine hard-earned policy credibility. In this environment it is reassuring to see policy continuity and commitment to transparency and predictability. The markets will be waiting to see more policy guidance from Governor Kavcioglu during the quarterly inflation report release on April 29th.



Source: J.P.Morgan