CBRT Preview: Can a 425 bps hike stabilise the Lira?

• Turkish central bank is expected to hike rates by 425 basis points to 22.00%.
• Investors are skeptical about the bank's ability to make decisions without being influenced by President Erdoğan and lower scale rate hike is likely to see Lira falling.

The Turkish central bank will announce its monetary policy decisions on Thursday, September 13, and is widely expected to hike its policy rate. However, the TRY's faith will be decided by how many basis points the CBRT chooses to raise the interest rate. Reuters expects the bank to hike its policy rate to 22% from 17.75% and it is yet to be seen if a 425 bps hike will be good enough to convince markets that the bank is ready to do whatever it takes to stabilize the Turkish lira.

When the USD/TRY pair skyrocketed from 4.9 to an all-time high of 7.23 in August, the central bank introduced a number of measures, including a revision to discount rates for collaterals against Turkish lira transactions and giving the banks the ability to borrow FX deposits up to one-month maturity, to support the financial stability and the pair has been in a consolidation phase since. 

Earlier this month, Berat Albayrak, Turkey's Finance Minister, reiterated that the central bank was independent of the government influence and they were ready to take the necessary steps in the next meeting to support the price stability. These remarks came after the latest inflation data showed that price growth in the country rose to its highest level in fifteen years at 18% in September. "In line with the previous communication, monetary stance will be adjusted at the September Monetary Policy Committee Meeting in view of the latest developments. The Central Bank will continue to use all available instruments in pursuit of the price stability objective," the Turkish central bank said in the press release.

Giving the track record of the bank, investors are skeptical about the bank's ability to make decisions without being influenced by President Erdoğan, who numerous times voiced his opposition to higher interest rates. In fact, when the central bank kept its policy rate steady in July despite a significant devaluation in the currency, Turkish Lira extended its losses against the major currencies such as the dollar, the euro, and the pound sterling.

It seems like the Turkish economy is at a crossroads. Higher interest rates are likely to lead to higher borrowing costs and the economic slowdown while a dovish policy move is likely to force the TRY to continue to weaken, which will make it even more difficult for the country to repay the massive amount of dollar-denominated debt held on Turkish balance sheets. Even if the CBRT takes a decisive step to hike rates by more than expected and the lira gathers strength in the near-term, the ongoing political conflict with the United States could prevent the currency from staging a broad-based recovery.

Expert opinions:

Danske Bank:  In Turkey, the big question is whether the central bank (TCMB) will be able to calm markets with a ‘proper’ rate hike on Thursday. We believe the answer is ’no’ if the hike is less than 600bp. Indeed, President Erdogan has no other ‘politically neutral’ tool to stabilize the TRY, especially ahead of a hike from the Fed later this autumn.

ING: We expect the CBT to deliver this month by hiking the policy rate to 21%, with a measured recalibration of monetary policy in a response to the ongoing weakening in the currency and further deterioration in the inflation outlook. We also expect the bank to maintain its commitment to deliver more policy action after the release of the MTP to help restore confidence.

TD Securities: We expect a 275bps hike of the WACF, which should support TRY in the short term (a possible 3-7% appreciation before the end of the week to around 6.0/6.25). But if the CBRT fails to deliver at least 175bps of WACF tightening, we see USDTRY moving higher to 6.60/6.75. A hike in excess of 200bps will push the very front-end of the curve higher relative to longer tenors. The whole should move higher and flatter beyond 1yr, but it's likely to steepen up to 1yr. A hike below 200bps is likely to see the opposite: front-end rates lower, and the curve flatter to 1yr.

Rabobank: We anticipate the central bank to raise its 1-week repo rate by 500bps to 22.75% on September 13. Our call is on the hawkish side of expectations based on the market median for a 325bps move, although the range of expectations is very wide from unchanged rates to a 725bps hike, according to a survey conducted by Bloomberg. A 500bps or even higher move accompanied by a very hawkish statement would be a major step on the long path of restoring confidence in the lira and local assets. Should such a hawkish scenario unfold, a corrective pullback in USD/TRY could extend towards the 6.00 level.

USD/TRY technical outlook

Daily chart

Despite the technical correction witnessed in the last couple of weeks, the RSI indicator on the daily chart stays near the 60 level, suggesting that buyers are still in control of the price action. Furthermore, the Fibonacci %23.6 retracement level of the March-August uptrend seems to have formed a stiff support near 6.35, where the 20-DMA is sitting as well. If the bank hikes rates by more than 450 basis points, the pair could break below that level and extend its losses toward 6 (psychological level/Aug. 24 low) and 5.84 (Fibonacci 38.2% retracement of the same trend).

An uninspiring policy move is likely to weigh on the TRY and lift the pair toward the next technical resistance at 6.65 (horizontal level) ahead of 7 (psychological level) and 7.23 (the all-time high).