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The Turkish lira is expected to rise to 3.60 level by the second quarter of 2017, with the central bank adopting one more 50 basis points rate hike in early 2017.
The lira sold off sharply yesterday, approaching 3.45 against the USD after the central bank raised rates by 50bps. The CBT raised its benchmark rate by 50bps but raised its overnight lending rate by a smaller 25bps.
Further, it cut FX RRR by 50bps and also eased payback terms on FX loans to exporters. Both measures will increase FX supply to the market but do not have much impact on the lira trend if it is already deteriorating.
More recently, adjustment to CBT's reserve options mechanism had released $2.6bn within the banking system which made no difference to the lira trend. Meanwhile, the measures will deplete FX reserves, and the market views that as essentially a zero-sum game.
In fact, the reduction to RRR has a slight easing effect on broader monetary conditions, which opposes the rate hike. The lira sold off because CBT's moves suggest that it has to act in a very measured way in terms of direct rate hikes, and may not be able to go much further. This is precisely the perception CBT needed to avoid creating, Commerzbank reported.
