There are quite a few factors pulling in different directions that could determine whether the CBRT decides to hold rates.
This isn’t an unusual situation for the CBRT, despite the new governor taking on a more aggressive stance to restore a certain amount of stability.
Even so, there are reasons to suspect that the market might take the result of the meeting with a little more calm than usual.
Factors for and against
We must note that the new governor surprised the markets with a massive hike in rates back in December.
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However, despite that, inflation during the subsequent month still beat expectations, In fact, it came in at a whopping 1.7% monthly.
This led quite a few analysts to suspect that another rate hike was in the cards. It appears Governor Agbal is making the most aggressive move yet to get inflation under control.
On the other hand, quite recently, the currency has started to appreciate, most notably against the dollar.
With a better exchange rate, inflation pressures could be lifted in the future. And that would mean a rate hike isn’t as necessary.
On the other hand, most of the lira’s gains have been against the dollar, which has been showing generalized weakness lately. So, it isn’t so much that the lira is doing well, but more that the dollar isn’t.
Real rates matter
Despite the massive inflation, the real interest rate is still at 2.0%. This offers a significant premium in a world of near-zero-or-below interest rates.
More to the point, when we factor in where we can expect inflation to go over the next year (the ex-ante real interest rate), it’s 6.6%.
Effectively that’s the highest rate among emerging markets.
So, while the latest inflation numbers have been scary, they are still expected to be transitory. In fact, the latest survey by the CBRT of economists showed a lowering of inflation expectations to 9.0% from 9.1%.
At the same time, they significantly raised their projections for where the USDTRY will be at the end of the year, from 8.087 to 7.7865.
Where the money is
Both of those factors combine to suggest that the CBRT has room to wait at least another month before raising rates. If, of course, that is something they are inclined to do.
The latest survey of economists shows that 76% believe that Turkey’s central bank will hold rates steady. The remaining 24% expect a rate hike of 1.0% (100 basis points, or equivalent to “four hikes”).
If we look at the money markets, however, option spreads for the USDTRY are at their lowest level so far this year. Naturally, they rose after the inflation report, but since then, they have settled down.
This suggests that the big traders in the market aren’t expecting much volatility after the rate decision. In other words, they are betting quite a lot of money on there not being a change in the rates.
Of course, this is the CBRT we’re talking about. And doing something surprising is kind of what we expect them to do.