The Central Bank of the Republic of Turkey (CBRT) kept interest rates unchanged at the first meeting under new authorities. Analysts at Capital Economics point out that while the decision was not quite as dovish as they had anticipated, they continue to think that the lira will fall sharply against the US dollar this year.
“While Turkey’s central bank (CBRT) kept the one-week repo rate at 19.00% at its first meeting under governor Sahap Kavcioglu, we still think that the central bank will cut its policy rate before long. With that in mind, we continue to expect the lira to lose further ground against the US dollar this year.”
“Even though we anticipate a drop in inflation, we still expect the headline rate to remain at double-digit levels. This means that the nominal exchange rate will need to depreciate to prevent the real exchange rate from appreciating.”
“We expect Turkey’s risk premium to remain high or even rise further.”
“We think that the US ten-year Treasury yield will rise over the remainder of this year and add to the downward pressure on the lira.”
“Policymakers have little ammunition with which to defend the currency. The CBRT’s gross foreign exchange reserves are extremely low relative to Turkey’s large external financing needs, even accounting for the expected boost from the upcoming allocation of IMF Special Drawing Rights.”
“We expect the lira to end 2021 at 9.50/$, which compares to its current level of around 8.05/$.”
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