Turkey: Monetary policy reacts, but more is needed

On 23 May, the Monetary Policy Committee (MPC) hiked the late liquidity window lending rate (then the effective monetary policy rate in the large set of Turkish rates) by 300bp to 16.5% in an emergency meeting in the afternoon. That move was triggered by the ongoing and accelerating sell-off in the TRY, which fell to a new low of 4.92 against the USD around noon (-5% in the day). Further, on 28 May, the Central Bank decided to simplify the operational framework of monetary policy. Starting 1 June, the one-week repo rate will be the key policy rate. This rate will be equal to the current funding rate (i.e. the late liquidity window lending rate, at 16.50%). The Central Bank overnight borrowing and lending rates will be determined at 150bp below/above the one-week repo rate. Overall, the two moves have helped the TRY to recover some lost ground to around 4.47 against the USD at the time of writing. We believe that another rate hike of 300bp or so is needed in order to facilitate a soft landing of the economy. If it does not come, or too late, there is a risk of a hard landing.