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The CBRT surprised the market today by shifting the interest rate corridor down by 25bp and increasing reserve requirements for TRY and FX deposits.
We do not expect any significant changes in interest rates in upcoming meetings, although we cannot rule out minor tweaking of the interest rate corridor by the central bank. We expect reserve requirements to be hiked further to moderate private sector credit growth.
The central bank lowered both the borrowing and lending rates by 25bp each to 4.75% and 8.75% respectively, against the consensus for no change. The CBRT also made adjustments to the reserve requirement ratio, with the FX RRR being raised by 50bp to 11% and the lira RRR hiked by 25bp to 10.8%, both for maturities less than a year.
Moves were made to moderate capital inflows and private sector credit growth. In the press release, the Committee indicated that recent credit growth (up 19% yoy in December) has been faster than envisaged, amid accelerating capital inflows. Therefore to contain financial stability risks, the CBRT plans to keep interest rates low to cool capital inflows and lira appreciation, while continuing with macro prudential measures to contain consumer credit expansion.
More adjustments will be required as credit growth looks set to rise further and non-residents buy bonds. We noted in Turkey trip notes - Don't count on more rebalancing, 14 Dec 2012, that we expect local banks to reduce some of their exposure to government bonds and increase lending to the real economy, pushing credit growth to at least 20% yoy in 2013. Banks are incentivised to do this as lending to the public provides them with a higher return of 8.5%-9%, compared to local bonds that yield 5.5%-6.5%. We have already seen this switch take place, as banking sector holdings of local bonds have reduced to 51% of total holdings as of November 2012 from 57% at the start of 2012. This has been offset by foreign inflows, with non-resident holdings of local government bonds rising to 23% of the total from 17% at the start of 2012.
The CBRT is attempting to maintain the rebalancing trend. We think that the deterioration of the CAD will resume in 2013, with an uptick in private sector credit growth supporting imports. We have already seen signs of this in the November current account breakdown, as imports grew for the first time in seven months, by 12% yoy - an outturn that is likely to concern the central bank. Additionally, CAD support from gold exports in recent months is likely to dissipate if the gas-for-gold trade with Iran is hit by US sanctions. Therefore the CBRT may be forced to take more significant tightening measures to halt import growth if the CAD begins to widen again, as we envisage.
CBRT confirms that inflation may increase slightly in January due to adjustment in tobacco prices. Although the CBRT expects inflation to continue on its downward trend following the January rise, we do not see this being the case and expect inflation to end the year well above the central bank projection of 5.3%. Our view is mainly due to unprocessed food price inflation. The drop in inflation to 6.2% yoy in December from the recent peak of 11.1% in April was mainly due to the deflation of unprocessed food prices. With unprocessed food price inflation averaging around 7% between 2006 and 2011, a negative reading in 2012 is not only unlikely to be repeated this year, but most likely will reverse and exceed the long-term average.
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