Last night the CBT hiked rates in the O/N "corridor" and in
the primary lending market.
This move was an aggressive statement for the market and made
a political statement that the central bank was going to be
apolitical going forward.
Rates were hiked in the O/N market from a corridor of
3.5%-7.75% to 8%-12%.
Primary dealer funding increased to 11.5% from 6.75%.
The net effect is a hike of about 2.50% and a move to
stabilize rates to a weekly basis.
Over the last 24 months, the CB of Turkey (
) has been using unorthodox measures for dealing with liquidity
in the market (daily changes and injections) and now has resumed
an approach that will increase currency stability and foster
"real" interest rates of around 2.5% (the difference between
inflation and the cost of money).
The fallout from the hike clearly is slower growth and a
strain on earnings in corporate sector, but this is clearly the
lesser of two evils.
The other key element of last night's announcement was that
this was a shot across the bow for CB independence in Turkey at a
time when the prime minister has made it clear he did not want to
see rates going higher.
Elections will take place in March, and the CB has been caught
in a political tug of war over what is best for sentiment vs.
what is best for Turkey and overall economic stability.
Last night was an important victory for Turkey's credibility.
Monetary policy has been simplified and there is not a return
to "orthodoxy". A 10% policy rate is manageable and will
ultimately anchor the currency.
Some folks believe at these levels Turkey can begin to look
interesting now that CBT has gone hawkish.They bit the bullet in
the pre-election period and the economy will begin adjusting
Looking for a "momentum" trade in this market right now is
Value will be found in the banking sector, which makes up a
dominant part of the Turkish trade-able market cap. NIMs for
the banks will suffer but value on a P/B basis will rise to the
The industrial companies, of which Turkey has many world class
players, will see earnings challenged as growth slows and costs
of financing increase.