The path of least res stance

Dunya Executive - - REPORT - Tatha Ghose, strateg st, Commerzbank

The Central Bank of Turkey (CBRT) left its benchmark interest rate unchanged at today’s meeting. In our view, this was a major policy mistake. CBRT commented that it maintains a tight policy stance. But, when the benchmark rate is 24 percent and inflation is also 24 percent, how is this stance “tight”? The decision shows that the CBRT has not morphed into an active inflation-targeting central bank as some government officials have claimed. Instead the CBRT is simply taking the path of least resistance – since the market is forgiving at the moment, why ruffle political feathers by continuing to hike rates? Given this attitude, prepare for more lira volatility down the line. The lira somewhat stabilized after the Central Bank hiked rates by 625bps in September, thereby defeating the speculation that it could never raise rates again under the presidential system. As inflation accelerated to 24 percent in the September data, it was widely anticipated that the CBRT would hike rates again by around 300bps in October. The September experience showed that it could do so. We, however, remained sceptical that this show of independence demonstrated the

CBRT had really transformed into pro-active inflation targeting central bank. (October 25)

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