Turkish central bank likely to hike key interest rate in H1 2018 – Danske Bank

The Turkish central bank, TCMB, had kept its key interest rate on hold at 8 percent in December, as was widely expected. Yet, the central bank hiked its late liquidity rate by 50 basis points to 12.75 percent, as inflation has accelerated to a multi-year high and the Turkish lira’s volatility has risen sharply recently. But the hike was too small as compared to markets expectations, which resulted in a large sell-off of the Turkish lira. According to a Danske Bank research report, the central bank might begin hiking its benchmark repo rate in the first half of 2018, if the current inflation pressure continues.

“We see weaker prospects for the TRY in the long term, as rising commodity prices weigh on the current account deficit and a hawkish Fed would put pressure on FX exposure of Turkish corporations. We remain cautious in the short- to medium-term as geopolitical woes are likely to add volatility to the pair”, added Danske Bank.

Geopolitical continues to be downside risk to the TRY forecasts if the confrontation with the U.S. escalates. The Turkish central bank’s easing on political pressure and improving macro are also downside risks to the TRY forecasts, stated Danske Bank.

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