“In our view, the geo-politics was ‘noise’ as the underlying trend towards a weaker TRY has been in place for longer than a decade,” argued Commerzbank analyst Tatha Ghose.
Key quotes
“The common theme through the whole period was a central bank which chose not to properly target inflation; one which chose to maintain a low or negative real interest rate in the face of one of the widest current-account deficits in the emerging market universe. The rest is history.”
“The lira somewhat stabilised after the central bank hiked rates by 625bps in September, thereby quashing the speculation that it could never raise rates again under the presidential system. As inflation accelerated to 24% in the September data, it was widely anticipated that CBT would hike rates again by around 300bps in October. The September experience showed that it could do so.”
“The Turkish central bank (CBT) left its benchmark interest rate unchanged at today’s meeting. In our view, this was a major policy mistake. CBT commented that it maintains a tight policy stance. But, when the benchmark rate is 24% and inflation is also 24%, how is this stance “tight”? The decision shows that CBT has not morphed into an active inflation-targeting central bank as some government officials have claimed. Rather CBT is simply taking the path of least resistance – since the market is forgiving at the moment, why ruffle political feathers by continuing to hike rates? Given this CB attitude, prepare for more lira volatility down the line.”
“We, however, remained skeptical that despite this show of independence, CBT had really transformed into a pro-active inflation targeting central bank. Today’s outcome confirms our view: at the slightest feeling of comfort with lira developments, CBT has decided to pause the hiking cycle. We therefore see USD-TRY rising sharply in coming months and disrupting the status quo.”
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