Central Bank of Turkey likely to lower interest rate; USD/TRY to trade around 3.20 by end 2016

The Central Bank of Turkey (CBT) is expected to lower its overnight lending rate at the monetary policy meeting scheduled to be held today. However, it is likely to keep other policy parameters on hold.

CBT is expected to lower its overnight lending rate once more by 25 basis points to 7.75 percent at today's MPC meeting. Other policy parameters including the key rate (repo rate, currently at 7.50 percent) and the overnight borrowing rate (currently at 7.25 percent) are likely to be left unchanged.

Following that, in November, one last 25bps lending rate cut to 7.50 percent can be expected before the rate corridor has narrowed the most that it can within the current framework; thereafter, there is need to wait until a new unified policy interest rate has been introduced, Commerzbank reported.

Over the past month, it was expected the bank RRR to be cut but the weakening trend of the lira put a halt to such secondary monetary easing moves. Now, with a December Fed rate hike looming on the horizon, CBT will hold back from more aggressive monetary easing until December.

The risk in this scenario is that the rapidly decelerating economy will hurt AKP's ratings within a highly charged political context, ahead of a likely constitutional referendum. This will mean mounting pressure on CBT to ignore lira movements and simply cut rates.

"We see USD/TRY at around 3.20 by the end of the year," the report commented.