Commerzbank’s Tatha Ghose warns that CBRT governor Karahan is again signalling premature monetary easing, considering a return to one-week repo auctions that would lower effective funding costs toward the 37% policy rate. With headline Consumer Price Index (CPI) likely stuck above 30% year-on-year and underlying momentum still too fast, any genuine move to ease could trigger renewed volatility and a potential blow-up in the Lira.

Premature easing threat for Turkish Lira

"Turkey's central bank (CBRT) governor, Fatih Karahan, is again back to signalling premature monetary easing going into an environment which still warrants tight money, not rate cuts."

"That may sound hawkish to some casual listeners, but for regular observers, the underlying implication is clear: repo funding would mechanically lower the effective funding cost back toward the 37% policy rate from the current 40% overnight lending rate."

"But this rate of “progress” will not be repeatable for many more months. Even with the June relief, headline CPI will still be stuck at 30%y/y plus, and the smoothed value of the seasonally-adjusted m/m trend may or may not fall by much – hence, underlying inflation momentum remains far too fast to be consistent with a credible disinflation path."

"In other words, Turkish economic and inflation fundamentals hardly call for resuming rate cuts, whether or not oil prices have retreated to pre-war levels."

"If CBRT were to genuinely move forward towards lowering the effective interest rate via a return to repo funding, the lira – which has been calm in recent days as oil and commodity prices have brought some relief (USD/TRY has been holding sideways of late) – will face renewed volatility and risk a blow-up."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)