Turkish Lira: Dovish corridor risks for TRY – Commerzbank

Tatha Ghose at Commerzbank expects Central Bank of the Republic of Türkiye (CBRT) to leave the 37% repo rate unchanged, while operationally signaling readiness to normalise the corridor and re-enable weekly repo once war risks ease. He warns that even subtle easing or talk of rates coming down sends the wrong signal given re-accelerating core inflation, uncomfortable FX reserves and worsening expectations, leaving the Turkish Lira (TRY) under continued pressure.

Technical easing seen as dangerous

"Turkey’s central bank (CBRT) will announce its July rate decision later today. The consensus unanimously expects the one-week repo rate to be left unchanged at 37.0%. But this consensus is less informative than it appears because the repo rate is not the effective interest rate at present. Since the Iran shock, CBRT has not relied on one-week repo funding in any meaningful way, and market funding has instead been pushed towards the 40% overnight lending window facility. "

"In this sense, an unchanged repo rate may co-exist with a dovish operational signal that CBRT is ready to “normalise” the corridor situation and re-enable weekly repo as soon as the war situation calms down. Some commentators might describe this as ‘technical normalisation’. Of course, because the oil price rose sharply even yesterday, it is equally possible that CBRT would signal the above, while also adding that “it is not time, yet”."

"Against this backdrop, even subtle corridor easing, or talk about when interest rates could be “normalised” back down sends the wrong signal – portraying a picture as if the rate is only high because of unavoidable external circumstances, and no policy failure at home – that, as soon as external conditions allow, rates could come back down."

"Needless to say, we thoroughly disagree with this assessment. FX reserve trends are not comfortable, inflation expectations have begun to worsen again, and the balance of payments remains vulnerable. The lira will continue to be under pressure."