Measured Tightening Will Not Be Enough

With international reserves falling to precariously low levels following US$6.4bn of FX auctions in defence of the lira, Central Bank of Turkey (CBRT) Governor Erdem Basci indicated on Monday that "a measured step to widen the interest rate corridor will be on the agenda", implying to us an upcoming hike to the overnight lending rate on July 23. However, we do not believe this will be enough to anchor the currency or restore confidence in CBRT credibility.

As the lira has gained 1.46% against the US dollar since the statement was released, we believe that markets have already priced in a rate hike, with downside risks on the currency due to our expectation that the CBRT's upcoming move will likely disappoint market participants expecting more aggressive action. Furthermore, we believe raising the overnight borrowing rate, or the lower bound of the interest rate corridor, would be more effective in steering deposit rates, and hence the carry appeal of the lira, higher. As such, we continue to expect that future monetary policy tightening will be necessary to defend against lira depreciation.

CBRT Behind The Curve
Turkey - CBRT Interest Rate Corridor & Money Market Rates, %

Measured Tightening Will Not Be Enough

With international reserves falling to precariously low levels following US$6.4bn of FX auctions in defence of the lira, Central Bank of Turkey (CBRT) Governor Erdem Basci indicated on Monday that "a measured step to widen the interest rate corridor will be on the agenda", implying to us an upcoming hike to the overnight lending rate on July 23. However, we do not believe this will be enough to anchor the currency or restore confidence in CBRT credibility.

CBRT Behind The Curve
Turkey - CBRT Interest Rate Corridor & Money Market Rates, %

As the lira has gained 1.46% against the US dollar since the statement was released, we believe that markets have already priced in a rate hike, with downside risks on the currency due to our expectation that the CBRT's upcoming move will likely disappoint market participants expecting more aggressive action. Furthermore, we believe raising the overnight borrowing rate, or the lower bound of the interest rate corridor, would be more effective in steering deposit rates, and hence the carry appeal of the lira, higher. As such, we continue to expect that future monetary policy tightening will be necessary to defend against lira depreciation.

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