CBRT skips the hike

Yesterday was an important day in many respects. An explosion in Manbij supposedly killing U.S. service members has made to the top of global agenda even before the world finds the time to get over Brexit.

Approximately two hours before the said explosion, Turkish Central Bank has released its interest rate decision. I told you about the odds yesterday. I largely expected CBRT to keep rates intact, with a little possibility for hike, since recently released data wasn’t looking very bright, to be frank.

Manufacturing industry, unemployment and retail data showed that Turkish economy has shrunk around 2% in the final quarter of 2018. In a period where Ankara was making its best efforts it possibly can to achieve economic growth, there could be only one reason to fail: resistance in core inflation.

Well, things turned out how people had expected: Interest remained unchanged. CBRT said they’ll keep looking ahead, implying that they would review the situation until March 6 meeting.

“Growth problems continue…”

I must say that there really are big problems about Turkey’s GDP growth. Although there was a slight improvement in December (which I do not believe to be true), negative growth has almost become a definitive thing now. Nonetheless, I do not expect Turkish growth to turn out to be lower than 2.5% on year-on-year basis.

CBRT will have to face further pressure because of these negative data. Obviously, CBRT would attempt to make some unplanned moves however this type of unstudied or uncoordinated behaviour will cause more panic instead of establishing confidence. That’s why I expect CBRT to cut rates by 100 to 150 bps over the next 3 months.

In global FX markets, on the other hand, we can see sharp exchange rate fluctuations of the euro against the dollar largely caused by Trump and spending debate as well as Brexit vote. Thankfully, this situation has a very slight impact on exchanges rates in Turkey.