TRY: Central Bank set to deliver significant rate hike today

TRY: Large rate hike expected today

As our Chief Economist for Turkey, Muhammet Mercan, points out in the EMEA week ahead, the Central Bank of Turkey (CBT) is today expected to hike the one-week policy rate from 8.50% to 20%. The expectation here is that a shift to more orthodox policy (higher rates) will be delivered now that recently re-elected President Erdogan has changed his economic team. Dynamics certainly seem to be changing for USD/TRY too. It now seems as though both international investors and local retail see value in the Turkish lira – or at least do not expect it to depreciate as much as priced into the FX forward curve. This is evidenced by the sharp fall in TRY implied yields derived from the one-month FX forwards, which have slumped from over 100% in May to just 19% now.

Assuming the CBT does deliver on the large hike today, expect USD/TRY to stay stable. However, it may not go that much lower given the expectation that local authorities may want to try to rebuild FX reserves into any TRY strength.