Rate Hikes Wont Halt Lira Slide

Short-Term Outlook

Facing a crisis of confidence and destabilising pace of lira depreciation as a domestic political crisis unfolded ( see 'Major Implications Of AKP Rift', December 19) amidst waning global demand for risky emerging market assets, the Central Bank of Turkey (CBRT) was forced to call an extraordinary monetary policy committee meeting and aggressively tighten on January 28, raising its benchmark policy rate by 550 basis points. In our view, this was sufficient to stabilise the lira and restore investor confidence over the short term. However, while acknowledging the potential for further consolidation in the coming months, we expect the underlying depreciatory trend to remain in place ( see chart), and forecast the lira to reach TRY2.3000/US$ by end-2014, from TRY2.1850/US$ at the time of writing.

Core View

Subdued Inflows To Prevent Appreciation
Turkey - TRY/US$ Exchange Rate And Balance of Financial Account Minus Current Account, 6mma

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Geography: Turkey

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