News & Analysis

The Central Bank of the Republic of Turkey today held the one-week repo rate at 14% for the third time in as many months. While today’s CBRT decision is in line with consensus expectations of steady rates, the Turkish lira still weakened moderately despite mildly hawkish changes to the phraseology of the statement.

Rising inflation risk via higher energy and grain prices forced the central bank to reference the worsening inflationary backdrop. However, given the CBRT has no intention of meaningfully changing their policy stance, the tweaks hold little relevance for the lira over the longer-term. Instead, USDTRY moved to fresh session highs as some market participants may have had a fraction of hope that the inflationary pressures would lead to a more substantial change in tone or even a slight tightening of policy to shore up the lira given further currency weakness only increases the price of energy and food imports.

TRY extends its decline against the dollar after the CBRT held rates in March. The currency is now down over 7% since the beginning of March

Headline inflation stood at 54.4% YoY in February, while food, energy and agricultural commodity prices are likely to drive higher in the near-term following the war in Ukraine.

The passthrough effect from the recent lira depreciation is another inflationary factor to consider, as USDTRY has risen another 7% since March after a period of stability in February and most of January. This has occurred in spite of speculations around FX sales from the CBRT and state banks to limit depreciation.

The developments in the USDTRY rate is a concern for markets as the only glimmer of hope for the lira was Erdogan’s promises for a stable currency following the FX-linked deposit scheme.

Looking ahead, the focus remains on FX interventions and other forms of heterodox measures as it doesn’t look like the CBRT plans to adjust its beliefs on monetary policy despite the ongoing war and its inflationary impact. In essence, markets may even view today’s unchanged rates as another cut as it effectively marks a continuation in the decline of real rates. Rate hikes in the near-term still remain off the table due to the political pressure, which means the lira remains vulnerable to broader risk sentiment, primarily driven by Russia-Ukraine at the moment.


Ima Sammani, FX Market Analyst


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