Turkish Lira: Depreciation risks increase as rates are cut - Commerzbank

52.0 is Commerzbank’s Tatha Ghose’s year-end forecast for USD/TRY. Following a seemingly benign inflation reading, Ghose expects another rate cut from the Central Bank of the Republic of Türkiye (CBRT). In his view, disinflation is not genuine, while regional trends favour higher inflation. He warns that further easing increases risks, as the Turkish Lira (TRY) remains overvalued in real terms and nominal depreciation trails inflation.

Rate Cuts Add to Real Exchange Rate Risks

"Turkey’s central bank (CBRT) will announce its rate decision later today: analysts nearly unanimously forecast a 100bp rate cut of the 1-week repo rate from 37.0% to 36.0%. The latest (apparently good) inflation print created the perfect background for CBRT to continue cutting rates, when in our view, inflation is not truly on a down-trend at all."

"September headline inflation fell to 29.7%y/y, and for a change, the seasonally-adjusted month-on-month increase also decelerated noticeably. But, we have argued before that this could prove to be a one-off rather than the beginning of genuine disinflation."

"The investment fund crisis provides some reason for caution too, although recent evidence suggests that withdrawals were mostly transferred into lira deposits rather than FX. Therefore, it is unlikely to interfere with monetary policy or prevent today’s cut."

"The lira continues to depreciate at a steady pace, with no sign of relief. Recently, CBRT governor Fatih Karahan tried to describe this as a voluntary strategy which would avoid a sharper future devaluation. We strongly disagreed."

"With nominal depreciation annualising to around 20%, compared with inflation in the 30%-35% region, the real exchange rate is still appreciating. Hence, the lira is not moving closer to fair-value or equilibrium in any meaningful sense. Rate cuts only increase the risks. We expect USD/TRY to trade at 52.0 by year-end."

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