EMEA Snap:Turkey (CBT Preview),Tight for longer =maintenance of status quo now

The Central Bank of Republic of Turkey (CBT) will hold its penultimate MPCmeeting of the year on Thursday, October 26. We believe the Bank will stay putagain despite weaker TRY and renewed deterioration in inflation dynamics.We expect CBT to keep rates (and liquidity) steady across the board in October.MPC's latest forward guidance is ‘to keep tight conditions for longer’ or inGovernor Cetinkaya’s own words ‘...to maintain tight stance decisively to ensurethe alignment of inflation outlook with the target(s)’.

    Poor September CPI, renewed deterioration in core inflation and CPI expectations,and renewed weakness in TRY, however, mean the Bank's policy stance, at least interms of ex-post real policy rate, is now slightly looser compared to a month ago.While such a backdrop as well as the output gap having already turned positiveto the tune of 2% of GDP in Q3may suggest a tighter stance by CBT, ina la Turca terms, we do not think that will be the outcome in the OctoberMPC meeting, given already-elevated levels in loan rates. The latter is probablydue to a fading spillover impact from the Credit Guarantee Fund, which hadkept monetary conditions slightly loose until mid-summer, as well as rising riskpremium emanating from higher geopolitical risks lately.

    Accordingly, we expect the Bank to stay put across the board, including itsliquidity strategy, and to reiterate its 'decisive' commitment to tight monetaryconditions until a marked improvement in the inflation outlook as well as'readiness' to tighten further

    CBT will also announce its new CPI projections on November 01st, and an upwardadjustment is likely due to the positive output gap, slippage in actual inflation incomparison to the August forecasts as well as higher oil prices and a weaker TRYsince August. The latest Medium Term Program already unveiled end-17, end-18and end-19estimates at 9% YoY, 7%, and 6%, respectively, versus 8.7%, 6.4%,and 5% pencilled in the CBT's August Inflation Report. Hence, it would not besurprising if the Bank's new CPI profile displays the 5% target-compliant levelsonly through 2020.

    Risks appear balanced this time around. Notwithstanding a weaker TRY of late,rekindled rise in CPI expectations, and robust real growth dynamics in Q3, theBank already recalibrated its policy guidance as tight for longer (versus tighternow - in a la Turca terms), pointing to steady rates on Thursday. While the Bankretains its commitment to deliver further tightening, if need be, we believe the threshold for such a move has yet to be hit, and may necessitate a more visibleworsening in pricing behaviour and/or weaker TRY from here.