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The Turkish lira was largely unchanged on the day yesterday after the Central Bank of Turkey (CBRT) announced an unchanged monetary policy decision, keeping the key policy rate at 19.00%. According to economists at MUFG Bank, the CBRT is unlikely to continue raising their policy rate if inflation rises further in the near-term which would undermine real yield support for the TRY.

CBRT keeps rates on hold for now but an easing cycle is likely to commence shortly

“The CBRT kept its key policy rate unchanged at 19.00%. But the statement did highlight the fact that the MPC is now being led by new leadership under Governor Kavcioglu by dropping the pledge to keep the monetary stance tight for an extended period of time. We would interpret this in the obvious way – the probable laying of groundwork for potential monetary easing going forward.”

“Our USD/TRY forecast profile (to over 9.000 in Q3 onwards) is based on the change in leadership at the CBRT resulting in a premature easing of monetary policy. We still pencil in easing in this quarter although we do not hold a strong conviction on that but nonetheless, we believe the risks are elevated on getting an earlier than desired easing.”

“The more favourable broader conditions and if US yields were to extend notably further lower from here may mean the USD/TRY move higher could be less than we assumed but nonetheless, we see no reason to change our core view of CBRT monetary easing that prompts a renewed bout of TRY weakness that sees USD/TRY extend notably higher from here.”