CBRT likely to keep its benchmark rates on hold

The Central Bank of Turkey is expected to keep its benchmark rates unchanged during its meeting today at 7.5 percent, according to consensus expectations. However, the central bank is likely to lower its overnight lending rates by 25 basis points to 8.50 percent. The ceiling of the rate corridor would be lowered in effect, noted Commerzbank in a research report.

The CBRT’s soft approach is unlikely to last for a longer period of time. Ultimately, the central bank might go for full repo rate cuts in response to political pressure and decelerating economic growth. The issue for the Turkish central bank, and as a result for the Turkish lira is that rate cuts, if and when they manifest, would come after inflation  troughed, according to Commerzbank.

There might be a situation where the Turkish central bank is lower rates as inflation begins to accelerate. Turkish lira, year-to-date, lagged the overall emerging market currencies rally and particularly lagged higher beta currencies. If confidence disappoints towards emerging market, or even if broader risk rally steadies, the Turkish lira is then expected to underperform to a larger extent, added Commerzbank.