Cristian Maggio, head of emerging markets strategy at TD Securities, points out that the CBRT's MPC will reconvene on Thursday, 16 January for its first rate-setting meeting of 2020 and are anticipating a 150bps cut of the repo rate to 10.50%, which is 113bps below the current consensus.

Key Quotes

“More importantly, the Weighted Average Cost of Funding (WACF), currently fixed at 11.63%, would fall to slightly above the 10% mark. Therefore, in case of further reductions of the WACF in the coming days, the CBRT's effective cost of lending could drop into single digits. For instance, the WACF touched a recent low at 11.29% on 3 January, just before the unfolding of the Iran-US crisis that forced the lira weaker and rates higher.”

“So if the WACF returns to similarly low levels, a 150bps cut of the repo rate would also imply that the WACF gradually adjusts towards 9.8%, achieving a return of the cost of CBRT lending to the single digits President Erdogan prophesied for 2020.”

“The CBRT may decide to cut less than 150bps in January, and spread residual easing over a longer period. Market conditions, we think, will dictate the pace and direction of Turkish rates in H1 2020.”