The CBRT under the new leadership of new Governor Erkan raised their key policy rate by 6.5 percentage points to 15.0%. While it was a step in right direction back towards more orthodox monetary policy settings, the size of the adjustment disappointed market expectations and triggered a fresh sell-off in Turkish assets and the Lira. 

In the near term, the shift back to more orthodox policy settings including allowing the TRY to float more freely is allowing it to find a new lower equilibrium which helps restore external competitiveness and rebalance Turkey’s economy. By delivering more gradual hikes, the Lira is playing a greater role in the policy shift. 

We believe it is still too early in the adjustment to expect a significant pick-up in capital flows into Turkey resulting from the policy shift that would help to provide more support for the Lira at weaker levels. As a result, risks remain heavily titled to the downside for the TRY.