The Turkish Central Bank (CBRT) is quite courageous as reduced the One-Week Repo Rate by a full point to 12.00%. The USD/TRY pair picked up pace following the announcement and the lira is set to remain under pressure, economists at Commerzbank report.

Playing with fire

“To lower the key rate by 100 bps to now 12% at an inflation rate of over 80% must be seen to be courageous by the market. Based on conventional monetary policy theory that does not justify rate cuts. The FX market sees that and is putting pressure on the lira.”

“CBRT may be able to prevent more pronounced lira weakness with the help of soft capital controls (its so-called policy of liraisation) for some time, but if the market gets the impression that things have gone too far (it is difficult to predict what might trigger that) it might face a massive selling wave. We remain cautious and expect continued lira weakness.”