MNI INTERVIEW: Chances Of CBRT Rate Hold Growing - Demiralp

Events in the Middle East could prompt the Central Bank of the Republic of Turkey to leave interest rates unchanged at 37% this month, a leading Turkish economist told MNI.

The CBRT announced on Sunday that it has suspended one-week repo auctions “for a period of time,” and was stepping into FX markets to “prevent possible volatilities in exchange rates and stabilise foreign exchange liquidity.”

The decision to suspend weekly repo auctions was a relatively easy step to take given there was already excess liquidity in the system, Selva Demiralp said, and means the central bank now has an additional margin of 300 basis points should it need to raise rates, currently 37%. (See MNI EM INTERVIEW: CBRT To Focus On Real Rate Stability - Demiralp)

“That said, I’m not sure how much of that space would actually be used, especially given the ongoing liquidity surplus,” Demiralp said. “More than anything, the move has a signaling effect. It can reasonably be read as the central bank stepping back from the possibility of a rate cut at the March 12 meeting.”

FX forward sales were also introduced last year shortly after the March arrest of Turkish opposition leader Ekrem Imamoglu, Demiralp noted, with the goal of smoothing out pressures in the foreign exchange market. 

“The Turkish central bank has become quite adept at navigating turbulence, largely because operating in a crisis-prone environment has made crisis management almost second nature,” she said.

“Given the substantial reserve accumulation since the policy shift after the May 2023 elections, I don’t see immediate risks to financial stability.”