Turkish Lira: Market doubts CBRT tightening resolve – Commerzbank

Commerzbank’s Tatha Ghose expects the Central Bank of the Republic of Türkiye (CBRT) to leave rates unchanged or only align the policy rate with effective funding, which he views as insufficient tightening. With monthly inflation still above 2.5% and reserves under pressure from FX intervention, he warns that reliance on macroprudential tools is inadequate and sees rising risk of a more disorderly Lira depreciation.

Insufficient tightening risks Lira weakness

"Turkey’s central bank (CBRT) will announce its rate decision today. Consensus is skewed towards no change, although a minority still expects a 300bp hike from 37% to 40%. Even if the bank were to move the policy rate to 40%, that would largely amount to aligning the repo rate with the current effective funding rate at the top of the corridor, rather than delivering a meaningful tightening in financial conditions."

"In our view, such a step would be only mildly constructive because we do not foresee that the lending rate would also be moved up from 40% to 43% and the repo facility left unused (which is the only combination resulting in effective tightening). With inflation dynamics still unfavourable, the key question is whether the CBRT is prepared to tighten decisively; a partial clean-up of the corridor framework at this stage would be too little too late."

"Our estimate suggests that seasonally-adjusted month-on-month change in prices remained above 2.5% m/m in May. While this marked a modest easing from April, when prices were hit by the full impact of the Iran-related oil shock, it would still rank among the stronger monthly readings of the year so far."

"In our assessment, however, greater reliance on macroprudential and secondary tools is unlikely to resolve the core problem. The Q2 inflation report already lifted the interim inflation target to 24.0% from 16.0%, and we would not rule out a further upward revision in Q3 and Q4."

"If that perception continues to dominate policy expectations, the risk of a more disorderly depreciation episode in the months ahead rises materially."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)