Most investors seem to think the Turkish central bank’s monetary policy committee will cut its policy rate by 100bps at its meeting on Thursday, December 16. Still, economists at Credit Suisse think depreciation pressure on the lira is likely to prevail in this scenario.

The risk is weighted towards more lira weakness

“We think the lira will remain subject to depreciation pressure if the central bank cuts the policy rate by 100bps tomorrow, even though that would be in line with the consensus forecast.”

“Our logic is that for as long as real rates are far into negative territory, investors will want to see a central bank pause in its cutting cycle as a minimum condition for the lira to stabilize. From this perspective a 100bps policy rate cut, although priced in, is likely to keep USD/TRY subject to an upward pressure. 

“A decision to remain on hold tomorrow would probably suffice to keep USD/TRY below its record high of 14.75-14.76 in the coming days without a need for the central bank to sell dollars.” 

“In a third scenario, downward pressure on USD/TRY could emerge if the central bank guides markets towards expecting policy rate hikes. But this scenario does not seem likely.”