Around this time of the year, it becomes increasingly more difficult to not make a Christmas related Turkey joke when the lira falls circa 4%. However, we’ve tried to show some restraint. As mentioned, however, the lira is down a further 4.5% against the US dollar this morning despite the central bank also showing a modicum of restraint.
The CBRT cut the one-week repo rate by a further 100bps this morning, bringing the policy rate down to 14%, which was largely expected by market participants.
In addition to this, the central bank stated that is has completely used the space allowed to them by the transitory inflation pressures in order to cut rates in Q4 and is therefore going to pause its easing cycle in Q1 in order to assess the impacts of its latest decisions.
Despite the more cautious decision by the CBRT today, the lira remains on the back foot.
This is arguably due to the phrasing around the duration of the pause in the easing cycle, which was less aggressive than we would have hoped for. Opting to pause for just one quarter in 2022, at which point inflation is likely to peak due to energy and exchange rate effects, suggests that the CBRT will resume cutting rates in the run-up to the 2023 election as soon as some disinflationary dynamics start to show in Q2, albeit from a higher base. Additionally, concerns are there that the continued rise in inflation towards a peak in Q1 will only embolden the President’s neo-fisherite view. This will lead to increased calls from the government to lower rates.
Given this, pressure on the lira is unlikely to abate in the coming months as markets remain wary of continually lower rates in Turkey heading into 2023 when the next election is scheduled.
With the central bank emptying its reserves again in a failed attempt to alleviate pressure on the lira and the currency continuing to slide to record lows on a near daily basis, financial risks are likely to become more apparent in the Turkish economy. This will only increase downwards pressure on the lira and could materialise in a full blown economic crisis if policymakers aren’t careful. In the near-term, the case for capital controls is only growing by the day.
USDTRY continues its parabolic rise with the lira down nearly 14% on the month so far
Author: Simon Harvey, Senior FX Market Analyst