Turkey MPC decision, money markets and inflation indexes

Following the MPC decision on Tuesday (24 January), the central bank provided all of its funding at the upper end of the interest rate corridor (9.25%), not at the late liquidity window (11.00%) yesterday. The central bank’s effective funding rate increased accordingly to 9.25% from 9.12% a day ago when the central bank had provided a mix of funding at the upper end of the corridor (8.50% then) and the late liquidity facility (10.00% then). The adverse market reaction to this development shows the significance of the marginal funding rate for the lira’s exchange rate, in our view – although the central bank’s effective funding rate increased yesterday compared to the previous day, its marginal funding rate declined to 9.25% from 10.00%, which did not support the lira. Meanwhile, the overnight FX swap rate declined to 8.00% yesterday from 9.39% a day ago.

The Statistics Office announced methodological revisions for the inflation statistics yesterday. There were adjustments in the weights of food prices (reduced by about 2pps), transport prices (increased by about 2pps) and housing and utilities prices (reduced by about 1pp). The Statistics Office also said that it will use a new methodology for the prices of seasonal products (which would be particularly relevant for unprocessed food items). The Office expects about 10% less volatility in the CPI index with the new methodology, but these changes will not impact the trend of inflation. The Statistics Office will also release new measures of core inflation, but will continue to release core indices H and I, which are widely used.