The Turkish central bank (CBT) surprised in the hawkish direction in some theoretical sense – the FX market was unimpressed, economists at Commerzbank report.

Approaching crucial elections

“Many observers had expected CBT to lower its benchmark rate by 50 bps yesterday. Hence, the hold decision was theoretically a hawkish surprise.”

“Still, several commentators think that a rate cut next month remains likely. Perhaps this is why the hold decision by CBT had no noticeable impact on USD/TRY.”

“We are approaching crucial elections: our base-case may be that Erdogan will hold on to the presidency, but polls suggest that he faces a genuine threat. The outlook for rates is therefore highly ‘bifurcating’ under the two competing scenarios, hence the market is justified in taking no strong position at this time.”

“Of course, all this is not to deny that the Lira’s inert response could be primarily because the currency has become increasingly disconnected from international markets as more and more capital controls have been imposed.”