USD/TRY likely to reach 7.25 mark over coming quarter, says Commerzbank

The USD/TRY currency pair is expected to reach the 7.25 mark over the coming quarter, according to the latest research report from Commerzbank. The lira crisis has paused for the time being after CBT announced, via its website, that monetary policy will be 'adjusted' at today's meeting because of elevated inflation risk.

Whether the Central Bank of Turkey (CBT) might hike its rate corridor by a slightly smaller 150bps or by a steeper 250bps is a side-note which will hardly carry any medium-term market implication. What the market will be looking for is a clearer demonstration that CBT has regained independence to carry out as much tightening as necessary to tackle the worsening inflation problem.

This is what minister Albayrak has claimed to be the case. Alternatively, the market would like confirmation that Albayrak, and via him, President Erdogan, has signed up for a significant monetary tightening exercise and will not waver from this until inflation has subsided.

"The interest rate level would roughly match inflation – we think inflation is heading to 22-23 percent in coming months – but this still falls in the "too little too late" category; in this situation, unless we hear that this is the first of a sequence of tightening steps, there would be no difference between this hike and the many of the past years which failed to solve the lira problem," the report commented.

A hike of 450-700bps, which would match the recent rise in market interest rates (e.g. 3-month and 1-year deposit rates). This outcome would be much more positive because it would not only raise the real interest rate level, it would also mean that higher political figures have blessed or co-signed a significant tightening exercise.