News & Analysis

Last month’s surprise 100bp rate cut by the Turkish central bank meant markets lost the last droplet of hope they had that the CBRT would attempt to combat the nation’s surging inflation and keep real rates in positive territory.

When the CBRT announced another 200bp rate cut on top of that today, while inflation is near 20%, the lira lost it and USDTRY spiked to 9.48 up from 9.25.

Going into the event, risks to the consensus of a 50bp rate cut were always tilted to the upside as some sell-side analysts were anticipating a 100bp cut. The jump to 200 however only further illustrates President Erdogan’s frustration from the central bank’s stance on policy.


TRY at record low while local 10y yields surge to levels last seen in 2019


The decision comes against a backdrop of mounting inflationary pressures and poses substantial risks for the lira.

While none of the CBRT’s options for today (e.g. adding back-door tightening or liquidity measures, or holding rates, as outlined here) would have helped to establish credibility for the CBRT, today’s policy decision undoubtedly was one of the most detrimental scenarios that could have played out for the lira. One area of consolation for the currency lies in the following change to the statement: the CBRT stated there is “limited room for downward adjustment to the policy rate”, which could suggest the central bank are front-loading rate cuts and will steer away from further easing. The addition of the “limited room” phrase has been introduced this month for the first time. In practice, this means markets may adjust to a new rate floor at 16.00%, whereas under previous expectations, some analysts foresaw smaller cuts throughout Q4 to see the rate falling as low as 15.00% by the end of 2021.

Whether the CBRT should have opted for front-loading rate cuts or gradually decreasing rates will become clear once all the inflation data for 2021 becomes available. For now, inflation is expected to rise further in Turkey as domestic developments are unlikely to materially change, which paves the way for a volatile and risky TRY outlook ahead.


Author: Ima Sammani, FX Market Analyst



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