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The CBT will hold its first monthly MPC meeting of the year on January 22. Recall that the Bank lowered the policy rate by 25bps to 5.5% at its December meeting, while leaving the interest rate corridor unchanged between 5% and 9%. The Bank also raised the reserve requirements for FX liabilities of short-term maturities by 50bps.
Regarding future actions, the Bank did not signal any further changes in the policy rate, while leaving the door open to adjustments in the interest rate corridor. We do not anticipate any change in the policy rate or the interest rate corridor at the January meeting. This is also the consensus view, although there are some investment houses which give a higher probability to the possibility of a cut in the lower boundary of the interest rate corridor higher. Note that the decision about the lower boundary of the interest rate corridor would depend on the currency outlook and an excessive appreciation of the currency is supposed to trigger a cut. Although the ongoing strength of foreign capital inflows to Turkey keeps the chance of such a cut alive for the upcoming meetings, the current level of the FX basket (0.5 USD+0.5 EUR), which has recently declined towards 2.05, is not yet in the overvaluation zone according to our calculations. We maintain our 2.09 FX basket forecast for the end of the year, considering that the CBT will remain focused on external imbalances. Regarding the upper boundary of the interest rate corridor, the critical parameter would be the credit growth rate. The current run rate of credit growth in FX-adjusted terms is around 18%, which is above the CBT's guidance of 14-15% and hence does not warrant a softening in the upper boundary of the interest rate corridor. On the contrary, sustained acceleration of credit growth may necessitate bolder steps in the form of macro-prudential tightening, particularly reserve requirement hikes going forward. For this meeting, however, we anticipate any steps in that direction to be limited.
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