Central Bank of Turkey unlikely to hike rates further, inflation likely to ease towards 15 pct by Q2 2019

The Turkish November inflation data that was released yesterday came in better than projection. Given that, the Central Bank of Turkey is unlikely to hike rates further, noted Commerzbank in a research report. Inflation is expected to ease towards 15 percent by the second quarter of 2019; and the Turkish central bank will possibly cut its repo rate gradually, starting in the first quarter of 2019.

“Assuming that CBT does not lower rates excessively, we forecast USD-TRY to reach 5.75 by the end of 2019 (down from earlier forecast of 6.50). All said however, investors should remember that the current core inflation rate of 21 percent is still too high in absolute terms and inflation pass-through pressure from the lira is still running at c.40 percent”, stated Commerzbank.

In other words, only with judicious management of monetary policy, the central bank can soft-land the economy and the exchange rate. This is assuming that no fresh EM risk off move would overtake markets before that time.

The Turkish lira is expected to maintain a gradually weakening trajectory in the medium term as Turkey’s fundamental problems would take much longer to solve, added Commerzbank.