The Central Bank of the Republic of Turkey (CBRT) surprised by lowering its policy (one-week repo) rate by 200 basis points to 16% from 18%. Consequently, the lira fell a further 2% immediately after the announcement, and USD/TRY peaked at 9.4867. Economists at TD Securities think that the USD/TRY trajectory will continue to be upwards.

CBRT cuts deeper against the odds

“The CBRT surprised by cutting the benchmark one-week repo rate by 200bps to 16% today. This leads us to add an additional 50bps of easing for the remainder of 2021 . But the pace and magnitude will strictly hinge on the lira performance.”

“We think that the USD/TRY trajectory will continue to be upwards, but we do not exclude temporary drops that can embolden the CBRT to act more resolutely in cutting.”

“We continue to forecast USD/TRY at 9.15 in Q4 and 9.75 in Q1 2022. We for now hold onto these forecasts, but see an increasing risk that the lira may weaken much faster and bring forward to 2022 (if not earlier) the breach of the historical 10 mark.”