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Last week, the Central Bank of Turkey raise the one-week repo rate by 200bps to 10.25%. Analysts at MUFG Bank, point out that conventional policy hikes are encouraging but additional tightening may be necessary in order to curb Turkish’s lira weakness. They forecast USD/TRY will rise above 8.00 during the first quarter of next years. 

Key Quotes:

“An excessively loose monetary policy amid high inflation, sizeable external financing requirements and decreasing FX reserves has led to significant lira depreciation over the summer. This prompted the CBoT to unexpectedly hike rates. Although the decision is a welcome step, more is needed.”

“Given a long history of growth-centric policy, and the potential for policy flexibility in shifting the true cost of funding (with the policy rate still below the weighted average cost of funding), markets will still need more convincing that last month’s hike marks a sustained change in policy. With this in mind, the details of policy implementation, such as outcomes like the marginal cost of funding, along with developments in dollarisation, reserves and the balance of payments, will be central to monitor.”

“The CBoT hike is encouraging, by itself, and signals that it may act earlier and more decisively against further FX weakness than previously thought.”