Commerzbank’s Tatha Ghose sees a binary Turkish central bank (CBT) decision, with markets split between no change and a 300 bp hike, and stresses that corridor tightening would still be de facto tightening. He argues disinflation was already unconvincing, external balances are deteriorating, and warns that failure to deliver significant tightening could trigger a sharper Turkish Lira (TRY) sell-off and raise the odds of abrupt adjustment.

CBT dilemma and Lira vulnerability

"The Turkish central bank’s (CBT’s) rate decision today comes at a point where the disinflation narrative was becoming increasingly unconvincing. The market consensus for today is bi-polar: analysts either expect no change to the official repo rate, or they forecast a 300bp rate hike – the majority expect no change."

"For us, though, it is irrelevant whether the price shock is temporary or permanent. In our view, the current shock makes the pre-existing unsustainable inflation situation all the more urgent. We do not accept that disinflation was working fine until the shock came along.

"Policymakers now acknowledge that the oil price shock will make this situation much worse in the months ahead. It is another matter that some skeptics, who also see disinflation as having failed, think that higher interest rates should not be used in future. We thoroughly disagree."

"But their reluctance confirms market concerns that they may choose the convenience of inaction because of political pressure. If there were no significant tightening step today, we would get concerned about a sharper lira sell-off. More secondary liquidity management measures, such as limits on swap exposures or obligation of exporters to sell FX proceeds to CBT etc., do not count: markets typically interpret such policies to confirm inability to act because of political constraints."

"The TRY exchange rate continues to be heavily managed. This can smooth volatility in the near term, but it does not resolve the underlying imbalances. The probability of a more abrupt currency adjustment will rise materially in the event of no monetary policy change."

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