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The upheaval at Turkey’s central bank means that economists at Capital Economics now expect a 200bp interest rate cut next month followed by further aggressive easing in the second half of 2021. But the result is that inflation will stay high and the lira will fall much further, to 9.50/$ by year-end.

Key quotes  

“So long as the lira stabilises over the coming weeks, we suspect that he will deliver a present to Mr. Erdogan in the shape of a 200bp interest rate cut, to 17.00%, at the next MPC meeting on April 15.”

“We now expect the benchmark one-week repo rate to be lowered to 10.00% by the end of this year.”

“Turkey’s risk premia are likely to rise further. A sharp fall in real interest rates and growing concerns about the inflation outlook will put additional downward pressure on the lira. We now expect it to drop from around 8.00/$ at the time of writing to 9.50/$ by the end of this year and to 10.50/$ by end-2022.”