Today marks a pivotal moment as the Central Bank of Turkey (CBT) convenes for its first meeting since initiating a rate-cutting cycle in December. Frantisek Taborsky, a foreign exchange analyst at ING, provides his insights on this development.
At the forefront of currency performance, the Turkish Lira (TRY) stands out among its emerging market counterparts. The expectation is that the CBT will proceed with another rate cut, trimming 250 basis points to bring the rate down to 45%. This anticipated move aligns with market consensus, driven by encouraging signals regarding inflation. These signals suggest an increase in real interest rates, which could lead to tighter financial conditions if the central bank doesn’t act.
As for the central bank’s stance moving forward, we anticipate consistent forward guidance. The CBT is expected to maintain a cautious, data-oriented approach for any future rate reductions. The official statement is likely to acknowledge a dip in the monthly inflation trend observed in December, while preparing markets for a temporary uptick in January. This prudence aims to anchor inflation expectations.
Turning our gaze to the foreign exchange landscape, the initiation of the cutting cycle in December introduced heightened volatility in the USD/TRY currency pair, largely skewed towards depreciation. This shift was driven by the CBT’s strong rhetoric and a narrower rate corridor. Despite the gradual erosion of foreign exchange carry benefits, the Lira continues to outperform its peers in emerging markets. Indeed, it remains our top pick for carry trades as we progress through the year.
