EMEA Snap:Turkey (CBT Preview),Policy rates have peaked
The Central Bank of Republic of Turkey (CBT) will hold its first MPC meetingof the year on Thursday, January 18. Having seen slightly better levels in TRYsince mid-December, advent of some deceleration in headline inflation lastmonth, and softening economic activity during Q4 2017 and into 2018, webelieve the Bank will stay put this time.
We expect CBT to keep rates (and liquidity) steady across the board in January.
MPC's forward guidance is still ‘to keep current tight conditions (here 'tightness' isdefined in CBT terms) until arrival of a significant improvement in inflation outlook,and to stay ready to hike further, if need be’.
The Minutes from the December meeting reiterated CBT's implicit policy reactionfunction, which prioritizes growth over inflation, as manifested in the followingkey paragraph:'…uncertainties over monetary policies of major central banks, the course ofcapital flows and geopolitical developments remain key to economic activity.
Exchange rate volatility that may arise from such factors poses a downside riskto the timing and strength of the support that financial conditions could provideto economic activity. In this regard, the contractionary pressure of the recentTurkish lira depreciation on domestic demand might be partly offset by the exportchannel’.
The second part, i.e. on exports, was new while the first section, possibilityof downside risks on growth from external factors, including geopolitics, wasunchanged from the October minutes.
The issue here is CBT continues to stick by this rhetoric even though (i) GDPgrowth reached 11.1%YoY in Q3 2017 (or ~7% in 2017); and (ii) both coreinflation and CPI expectations hit their respective all-time high. Such (ongoing)reference to downside risks on growth despite exploding nominal GDP validatesour perception that CBT’s reaction function favors growth (and orderly weaknessin TRY ahead) over inflation.