USD/TRY: Prepare for more volatility on CBT no rate change - Commerzbank

Analysts at Commerzbank, consider the no change in the interest rate at today’s Turkish central bank meeting, a policy mistake. They see USD/TRY rising sharply in the coming months. 

Key Quotes: 

“The Turkish central bank (CBT) left its benchmark interest rate unchanged at today’s meeting. In our view, this was a major policy mistake. CBT commented that it maintains a tight policy stance. But, when the benchmark rate is 24% and inflation is also 24%, how is this stance “tight”? The decision shows that CBT has not morphed into an active inflation-targeting central bank as some government officials have claimed. Rather CBT is simply taking the path of least resistance – since the market is forgiving at the moment, why ruffle political feathers by continuing to hike rates?”

“Not hiking rates is always easier because of government opposition to higher interest rates. Raising rates need to be justified and defended vigorously – if that is not utterly necessary at this moment, avoid it. The second sense is that since the lira has rallied noticeably over the past week, it does not require defending right now. Rather, this move can be interpreted to mean that the resolution of US-Turkey political tensions has removed pressure from the lira permanently.”

“The lira somewhat stabilised after the central bank hiked rates by 625bps in September, thereby quashing the speculation that it could never raise rates again under the presidential system. As inflation accelerated to 24% in the September data, it was widely anticipated that CBT would hike rates again by around 300bps in October. The September experience showed that it could do so.”

“We, however, remained skeptical that despite this show of independence, CBT had really transformed into a pro-active inflation targeting central bank.”

“At the slightest feeling of comfort with lira developments, CBT has decided to pause the hiking cycle. We therefore see USDTRY rising sharply in coming months and disrupting the status quo.”