CBT cut overnight lending rate by 50 basis points

CBT reduced its overnight lending rate from 10 percent to 9,50 percent, maintaining one week repo rate and overnight borrowing rate at 7,50 percent and 7,25 percent, respectively. CBT suggests that global volatility has increased to some extend recently. Increase in global volatility broadly stemmed from Fed president's assessments over US economy. They have been expressing that there is no problem with US economy. According to them economic conditions are progressing positively and should give Fed to hike its policy rate in summer montsa.

Monetary Policy Committee repeated that headline inflation continued to decline due to mainly unprocessed food prices. But core inflation underperformed in this period. Therefore, CBT maintained its tight liquidity stance. CBT also changed its "lessened wide interest rate corridor needs" assessment with "increasing resilience of the economy against shocks". In this respect, CBT tried to say that potential rate cuts on upper bound closed to end. I think one more rate cut on the upper bound can be carried out next month, but Fed's forward guidance about rate hikes and regional Fed president's speeches must be closely watched.

If Fed hikes its policy rate in June or July, CBT would have to raise its overnight borrowing rate (7,25 percent) and one week repo rate (7,50 percent) at the first meeting after Fed's. On the other hand, if Fed delays its interest rate hike timing by the end of the year (probably in December), CBT can have an opportunity to ease a little bit more on the upper bound.

Current account balance came in line with the expectations

• Current account balance deficit was realized at US$ 3,7 billion in March (2015 March: US$ 4,8 billion).
• With this outcome, the current account deficit in 1Q of 2016 reached US$ 7,9 billion (1Q of 2015: US$ 10,5)
• After March data, 12 month rolling deficit came below US$ 30 billion.
• Lower oil prices continued to support the improvement in the current account balance.
• On the other hand, decrease in the tourism revenues subdued balance on service. Russian sanctions have had negative effects on Turkish tourism sector.
• Foreign direct investments are keeping its sluggish performance in March as well.
• But, in line with capital inflows to EM, portfolio inflows gained momentum in March.
• CBT's official reserves recorded a net increase of US$ 1,5 billion in March and net error and omissions was realized at US$ 1,1 billion.
• Tourism revenues may reverse the downward trend in the current account balance in coming months.
• Yet, demand from Euro Area can support the improvement of 12 months rolling deficit in coming months as well.

Prime Minister Ahmet Davutoğlu decided to step down

• Justice and Development Party (AKP) hold a meeting today. İt is not expected that the PM Davutoğlu will be party leader nominee.
• According to Reuters  news; there are four major party leader candidate;

1. Deputy Minister Numan Kurtulmuş
2. Energy and Natural Resourses Minister and President's son in law Berat Albayrak
3. Transportation Minister Binali Yıldırım
4. Minister  of Justice Bekir Bozdağ

• The most important concern of the market is the economy menagement. Weather will it be changed or not, is closely monitored by financial markets. But I think it won't be changed and Mehmet Şimşek will continue to head to the economy.
• On the other hand, there is some concern about snap election. İf AKP moves to snap election Turkey's financial markets will price it very negatively. According to surveys; AKP slightly increased its votes after November 1.
• There are also some possibilities that right wing MHP or Pro-kurdish party HDP or both of them may fall below 10 percent treshhold. İf these possibilities come into reality, AKP's seats go up beyond the 330 seats which can lead to precidency referandum or 367 by which constituonal reforms can made.

CBT cut upper bound of interest rate corridor by 50 bp

• In line with the consensus forecast, CBT lowered the overnight lending rate from 10,5 percent to 10 percent.
• CBT declared that the decline in global volatility measures (VIX and MOVE) allowed CBT to cut overnight lending rate.
• CBT also stated that wide interest rate corridor (275 bp) is not needed any more. This means interest rate cuts will continue.
• CBT expects CPI will continue to decline in short term. On the other hand core CPI is not decreasing as expected. Core inflation makes CBT to be cautouis in cutting interest rates further.
• USD/TRY did not increased after interest rate decision. Because of radical interest rate speculations USD/TRY drop off 2,81 levels.
• Treasury yields also came down further after decision.

Industrial production signals robust economic growth at the first quarter of 2016

• Industrial production increased at %5,8 (wda) in February compared to the same month of the previous year.
• Non durable consumer goods (%9) and intermediate goods (%7) was decisive in this increase.
• Increase in minimum wage could be effective in this increase.
• Industrial production increased in first two month of Q1 at %5,7.
• Leading indicators signal that ındustrial production will smooth in April.
• Although IP will lose some traction in April, it is expected that gdp will be robust at Q1.

CPI is declining and expected to decline by half of the 2016

• Food prices sent inflation in March under CBT's year end forecast (%7,50)
• Clothing and footwear can smooth the downward movement of the CPI in April because of seasonal conditions
• Oil prices can also affect the CPI negatively in April.
• But it is expected to continue to fall in April through base effect