FX traders were stunned – and TRY longs painfully crushed and stopped out – after the Turkish central bank unexpectedly kept the one-week repo rate unchanged at 17.75% (the overnight lending and borrowing rates were also left unchanged at 19.25% and 16.25% respectively), slamming consensus expectations of a 100bps increase which was already priced in.
The outcome can only be described as chaos (as many have)…
I mean, just wow. Turkey holds interest rates steady. Utter chaos on markets.
USD/TRY bursts through 4.91 in mere seconds.
— Can Okar (@canokar) July 24, 2018
… and as a result of the shocking decision, the Turkish Lira is in free fall mode, plunging as much as 3.4% with the USDTRY exploding from 4.75 to 4.91 in the blink of an eye.
The CBRT press release highlights that the “tight stance in monetary policy will be maintained decisively until inflation outlook displays a significant improvement. Inflation expectations, pricing behavior, lagged impact of recent monetary policy decisions, contribution of fiscal policy to rebalancing process, and other factors affecting inflation will be closely monitored and, if needed, further monetary tightening will be delivered.”
It was not exactly clear how the inflation outlook with improve if the central bank will not increase rates, prompting some to ask if it was dictator Recep Erdogan – who has been vocally against highest rates and who recently made himself de facto head of the central bank – who wrote the statement.
As a reminder, traders have been worried that after President Erdogan appointed his son-in-law to the Finance and Treasury, while taking more control over the central bank, his influence would prevent the central bank from hiking further, even if they gave him the benefit of the doubt. They are no very disappointed.
Meanwhile, as a result of the aborted tightening, Turkey’s inflation is set to soar even more: June’s inflation data saw the Y/Y rate rise to 15.4% from 12.1%, the highest print in 15 years.
Ahead of the announcement, JPMorgan said that “the CBT needs to help restore policy credibility, and hike rates in light of the sharp rise in inflation in June and also the re-emergence of rising inflation expectations” (12 month expectations are at around 11%; four months ago they were around 9%).
Other analysts similarly argued that a rate hike is critical to ease the prevailing sense of investor scepticism, against a background of rising external risks, and concerns that Erdogan is preparing to take over the only “sane” financial institution left.
In the end it was not meant to be, and the result is sheer chaos in the Turkish FX market. Finally, for the BTFDers, Citi was laconic: “we wouldn’t try to pick a bottom here for the time being.”