Underperformance of the lira continued through 2015, triggered by the lack of response by the CBRT. TRY outlook in 2016 will largely depend on the expected monetary policy simplification and normalisation of interest rates.

CBRT in its December meet signaled that the simplification of its monetary policy will go into effect in January in preparation for the possible normalization of monetary policies on a global scale. A successful implementation ensuring greater transparency and delivering some tightening in liquidity would provide an important buffer to the TRY in a challenging global economic environment.

The interest rate corridor functioned efficiently in 2012 helping soften the sharp movements of the Turkish Lira to protect it from the effects of market speculation. However, where the Fed has been shifting towards normalizing its monetary policy, the upper limit in the corridor loses its credibility; thus, leaving the interest rate corridor ineffective. The narrowing of the interest rate corridor and making the one-week repo the main policy instrument will thus be crucial.