The Turkish central bank (CBT) cut the rate corridor by 100bps yesterday, in line with expectations. However, as before, there are clearly contradictions between CBT’s assessment of inflation risks and these continuing rate cuts. Inflation is not decelerating convincingly; hence, rates should not be cut in the first place. The inflation outlook has deteriorated, led by increases in the cost of services, primarily in university tuition fees and school bus fares, Commerzbank's FX analyst Tatha Ghose notes.

USD/TRY is about to breach the 42.00 level

"CBT’s market survey showed inflation expectations for end-2025 at c.32%, which hardly represents any moderation from the present 33%. These expectations are faster than CBT’s own upper forecast bound (29%), and September CPI data indicated that underlying month-on-month inflation is still annualising to c.30%. So, we do not see a pathway to automatically reach the 16% target for end-2026 – especially if interest rates were to be progressively eased. It does not suffice to just use a smaller rate cut step than the previous 250bp and 300bp."

"The statement claimed that CBT would maintain a tight monetary framework until price stability took hold. It also signalled its preparedness to deploy supplementary macroprudential tools to bolster the monetary transmission mechanism in the event of unforeseen strains. These promises sound somewhat hollow at this time. We repeat that CBT will likely continue to cut rates because policymakers sense that President Tayyip Erdogan's patience with conventional policy will run out if rates had to be kept high any longer. Therefore, CBT justifies cutting rates while promising to use secondary policy tools in case inflation were to re-accelerate."

"In conclusion, the fundamentals for the lira exchange rate are deteriorating. Political commotion and market volatility are complicating the central bank's job to maintain a lira stable and avoid dollarization. By proceeding with a premature easing step against the backdrop of political risk, CBT reduces the relative attraction of TRY deposits, potentially nudging residents toward additional FX demand. It appears that USD/TRY is about to breach the 42.00 level soon."