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In the view of the Goldman Sachs analysts note that they remain cautious on the Turkish lira, as “Turkey’s large exposures to travel and tourism have meant that pressure on fiscal balances” during the coronavirus crisis.

Key quotes

“The TCMB has continued to prioritize growth: it has cut the policy rate by 150bp since Mar & nearly 16pp since Jul ’19. While providing a dovish impulse to growth, this has disincentivized foreign inflows by driving the real rate into -ve territory and, with the private sector deleveraging, the bank has also needed to step in to hold TRY steady.

This growth-driven approach has driven a rapid drawdown in FX reserves, and-absent a rise in real rates to attract foreign inflows-is pushing the policy mix towards binding constraints.

Against this backdrop, the TCMB provided a rare hawkish surprise last week: keeping the policy rate on hold, potentially ending its deep cutting cycle. Does this signal a sustainable pivot away from policymakers’ desire to support growth, and towards addressing imbalances?

Especially given that the TCMB’s inflation forecasts remain low, relative vs. consensus & our forecasts, our economists caution re: over-interpreting. We remain cautious on TRY.”