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The Turkish central bank unexpectedly lifts rates to 50 pct

21 Mar 2024 13:48|Bartosz Sawicki

Although the end of the tightening cycle was declared in January, the Turkish central bank was forced to lift the one-week repo rate from 45 pct to 50 pct. despite local elections looming.

Monetary policy in Turkey entered a critical phase. The vicious circle of long-known vulnerabilities seems to be gaining momentum yet again. Inflation is refusing to abate, the lira is under renewed pressure and foreign capital inflows appear to be losing momentum, exposing depleted foreign exchange reserves. It quickly became clear that even delivering 3650 basis points of cumulative hikes since the May 2023 presidential elections were not enough to quickly fix imbalances cultivated by years of irresponsible, unorthodox policies.

Before today’s unexpected move, CBT has stepped up macroprudential tightening measures aimed at stabilizing the lira. The USD/TRY's managed upward trajectory, which was in place since summer, has recently steepened, and the exchange rate approaches 32.50 sooner than previously expected. The lira has already slumped over 3.5 pct against the US dollar this month, which marks the strongest depreciation since June 2023, when the currency declined by over 25 pct. The fintech Conotoxia forecasts assume no respite for the Turkish currency in sight. We expect the USD/TRY pair is poised for an inevitable further move higher towards the 35 mark.

Commercial banks' monthly target for the share of lira deposits was raised last weekend to counteract the currency's weakness. However, such tools are doomed to fail in the wake of the severity of recent developments and a rate hike became inevitable. The monthly price growth exceeded expectations in January and February, respectively, at a figure of 6,7 and 4,5 pct. Such jumps contradict overly optimistic inflation projections, assuming the annual CPI rate will fall to 36 pct by the year-end after it tops out close to the 75 pct y/y mark in May. Today the CBT sent a clear signal it is unwilling to tolerate any substantial deviation from forecasts.

21 Mar 2024 13:48|Bartosz Sawicki

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without acknowledgement of the source is prohibited.

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