Sharp rate hikes in Turkey fall short to halt the lira’s decline

The Turkish Central Bank raised interest rates at the fifth consecutive meeting. In line with market expectations, the Monetary Policy Committee repeated the move from September and hiked by 500 basis points. Since the May elections, the one-week repo rate has been lifted from 8.5 to 35 pct in the hope that a U-turn in monetary and fiscal policy and a reliance on a more orthodox toolbox will curb inflation and restore macroeconomic stability.

The annual CPI rate topped 60 pct in September and is set to remain in an upward trajectory until Q2 2024, when it will likely breach 70 pct before easing to less than 50 pct in the second half of next year. The conflict in the Middle East poses a threat to the inflation outlook and might result in further deterioration in the balance of payments dynamics. Today’s hike might be followed by a similar move next month. Afterwards, the CBT might opt to pause the tightening until the local elections in March.

The Central Bank of Turkey's credibility had been ruined over the years. The faith that the CBT will be able to pursue restrictive courses is impossible to be re-established in just a couple of months. The lira's sharp bounce from late August, when the central bank stepped up with rate hikes proved to be unsustainable. In the last two months, the USD/TRY rate has gradually ascended to trade above the 28.00 handle. The almost linear nature of this trend suggests that the central bank is actively controlling the pace of Turkish currency depreciation. A further USD/TRY's drift towards the 30 mark remains Conotoxia's baseline scenario for the next couple of months.