Turkish Rates on Hold Despite 80% Inflation

The CBRT is expected to stick to its unorthodox policy, but how will the markets react if it keeps the lowest real rates in the world?
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Reality changes but policy remains the same

The consensus among economists is that the CBRT will keep rates unchanged at the next meeting, for the eighth time in a row. This despite inflation peaking above the 80% mark, compared to the already high inflation target of 5.0%. When taken in the context of the 14% policy rate, the real interest rate is -66%. But, that doesn't mean the lira is in for more weakness.

It's widely understood that the CBRT is responding to pressure from President Erdogan, who is up for reelection next year. This makes figuring out the trajectory of policy a little more difficult since it responds to political needs, not monetary ones. This leads to the idea that the CBRT will stay on the sidelines until the election, which could let inflation continue to rise.

Any chance of a break?

On the other hand, there is always the chance that the CBRT will try to wrest some credibility back, and raise rates before the governor gets fired. Again. With reserves dwindling to support the currency, the bank is under increasing pressure from reality to change course. That means there could be some volatility around the rate decision as some traders take bets that the monetary policy board will break ranks with the country's President.

Most recently the CBRT raised its forecasted inflation forecast for this year to above 60% from 43% previously. And insisted that there were more macro measures it could take if necessary. Meanwhile, geopolitics remains the most likely driver of the lira.

Turkish Lira nears top
The price of USD/TRY has recovered nearly all the losses incurred in the year after crashing from 18.50 to 11.00. Shy off the top at 18.00, the emerging currency pair eyes the 20.00 mark so long as it maintains a firm position above the 50-day average of 17.50. Sliding lower will expose the last SMA rejection area near 16.00, and then 15.00, for being a highly active zone.

In the short term, bulls are facing trendline support formed by the ascending channel top starting in early January around 13.00. If the top channel surrenders to bears, the bottom on the other side of the channel will become increasingly important.

Key takeaways

Economists are expecting Turkey to keep rates unchanged, but that doesn’t mean the lira is due more weakness as the policy trajectory before next year’s elections responds to political and not monetary needs.

There is an outside possibility the CBRT will raise rates to stem inflation and improve real rates, but there are many other factors in play that can lead to high USD/TRY volatility.