TRY: No change on the cards

It is unanimously expected that Turkey’s central bank (CBT) will leave its base rate unchanged at 50.0% at today’s meeting. Even if continuing lira depreciation might have raised some question marks about unchanged rates under other circumstances, now that June CPI surprised to the downside, the likelihood of any other policy change has become remote, Commerzbank FX strategist Tatha Ghose notes.

Inflation below 40% is unlikely

“We, ourselves, have however cautioned in recent days that the CPI improvement was not convincing, while more lira depreciation could follow as it was clear that policymakers were having to intervene to defend the 33.0 USD/TRY level in recent weeks before the exchange rate finally breached it.

“We expect to hear the language that CBT will maintain tight monetary policy for longer as inflation risk still exists. This is what the governor maintained in recent remarks. Of course, it is quite bizarre that, with Turkey’s long history of out-of-control inflation, just after one questionable CPI reading, the central bank even has to explain why it is not cutting rates.”

“The FX market is increasingly nervous that President Tayyip Erdogan may not have patience with high interest rates now that inflation is somehow appearing to moderate. In Turkey, inflation could moderate from current 70% up to 50% or 40% in this manner. But beyond that will be problematic. And today’s policy decision will not constitute a positive step towards solving this problem.”

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