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Analysts at Nordea Markets note that the Turkish central bank just hiked its policy rate by 625bp and it was a short-term support to the TRY, but too early to call off the crisis, as markets need to see firm prove that the central bank can act independently going forward.

Key Quotes

“The Turkish central bank (CBRT)  surprised positively today with a hike in the 1-week repo rate of 625 bp! The median expectation among analysts was a 325bp rate hike on the back of the CBRT’s  announcement  3 September in which it was said that “necessary steps would be taken to secure price stability”. Following the announcement expectations were very wide as the range was from unchanged to 725 bps hike. Nordea expected a rate hike, but not of the repo rate.”

“The initial market reaction has been TRY-positive  with USD/TRY down from 6.45 to 6.20 (briefly touching 6.03), i.e. roughly 4% stronger.”

“Although this is a step in the right direction, the lira crisis is not over. Credibility takes time to restore. The CBRT’s credibility has already been damaged and thus, the markets still need to see firm prove that the central bank can act independently from Erdogan.”

“We believe this is shown in the relatively “mild” TRY appreciation, when comparing to a surprisingly high rate hike of 625bp.”

“The TRY could suffer more in the medium-long term as the recent financial turmoil makes us believe that the  Turkish economy will face a hard landing.”

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