Wait and see mode

Dünya Executive - - REPORT - Deutsche Bank

Given that we foresee single-digit levels in headline CPI only from late H1 2020, we retain our call for the Bank to keep rates unchanged at current levels (17.75 percent) for another year, with a bias to hike further if inflation surprises further to the upside and/or TRY enters again a visible period of underperfo­rmance, particular­ly in late Q3 or early Q4 this year. In case of renewed FX instabilit­y ahead, a likely tool to dampen volatility in the lira could be resorting to active liquidity management by the MPC, and hence a return to the corridor mechanism. While the Bank recently moved to a single policy rate regime, this was not full simplifica­tion due to ongoing co-existence of all three different rates for funding. Such a backdrop means the Bank still keeps the door open for utilizing the overnight lending, if required - despite ongoing sub-optimality associated with the former system. Next thing to watch is the new Medium Term Program and the embedded fiscal outlook. The government already unleashed a series of election packages, which will likely turn fiscal impulse less negative in the coming period. (July 25)

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