Policy rate unchanged, as expected

TURKEY - In Brief 25 Oct 2018 by Murat Ucer

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At today’s Monetary Policy Committee meeting, the policy (one-week repo) rate was left unchanged at 24% (simple), as expected (see chart). There were a few outliers in the polls, expecting (or hoping?) that the Bank would hike rates with a view to rebuilding its credibility and/or because real policy rates are already slipping into negative territory. These are entirely fair and legitimate points from a ‘normative’ perspective, but as we’ve last pointed out in Sunday’s note, that’s not how things typically work in Ankara. The CBRT seems to have a fairly simple “reaction function” or decision rule so that when there is no clear threat to financial stability, it stays put. If a very clear threat emerges or becomes too obvious to dismiss (say, through a markedly weaker lira or severely heightened market volatility or panic even), it first seeks political clearance and once given the nod somehow, action is taken.Finally, the content of today’s CBRT statement was also broadly unchanged from the September statement. The Bank expects weaker demand conditions to help disinflation over time, but the “upside risks on the pricing behavior continue to prevail” in the near-term. We concur. There is much uncertainty regarding the October reading -- because of a host of interventions, campaigns and lira appreciation in the month -- but we think inflation should continue to climb a little further in the period ahead, before weaker demand conditions begin to tame it, relatively speaking.