Turkey: Flat Policy Rate, Wider Corridor Expected

Citing COVID-19 related uncertainty, the CBT has relied on liquidity measures to tighten its stance rather than a direct policy rate hike. In the current setup, the CBT has been using newly introduced 1-month repo auctions (the interest rate being determined by liquidity conditions, and floated in 11.0-11.3% range in the last two weeks) along with the upper band of the rate corridor (at 9.75%) and late liquidity window (at 11.25%) to provide liquidity to the banking system. This allows the CBT to push the effective cost of funding up to the late liquidity window rate, implying relatively small room from the current level. Accordingly, we see the possibility of a wider corridor with at least a 75bp upward adjustment in the overnight lending rate and late liquidity window rate given continuing financial and price stability concerns, while the bank will likely keep the policy rate flat again.


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