Raising the TRY swap rate is a tightening move in terms of increasing the cost of total funding. Before that, the TRY swap rate was equal to the 1-week repo rate level. Now, this rate is equal to the overnight lending rate. The CBRT's increase in indirect and direct interest rates is positive in showing its intention to tighten. The average funding rate, which made a bottom in July, was increased to 11.56% with the indirect and direct tightening moves in the recent period.
With the constant depreciation of the TRY, inflation expectations are going up very rapidly, and therefore we think that the Central Bank will continue to tighten at the October 22 meeting. The fact that September inflation is on par with August inflation will not relieve the Central Bank, because as the TRY depreciates, the inflation outlook deteriorates further and the full impact of the depreciation on the CPI will be felt cumulatively in the following months. Therefore, the Central Bank should not interrupt the tightening cycle. An interest rate hike of 150-200 basis points may come on October 22.
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