USD/TRY: Tight CBRT policy is important for sustaining a stronger lira – MUFG

During January the Turkish lira strengthened against the US dollar from 7.4404 to 7.3050 as TRY continues to benefit from the shift to more orthodox policies which have boosted confidence in Turkish assets. In the view of economists at MUFG Bank, a hawkish CBRT is helping the Turkish lira to outperform.

Key quotes

“While the CBRT did not raise rates again at the latest policy meeting, they did provide a more hawkish than expected statement. The CBRT signalled more strongly that tight policy will remain in place for an extended period, and they are ready to raise rates further if required. It has helped to ease some concerns after President Erdogan renewed calls for lower rates ahead of the policy meeting.”

“Rates on offer in Turkey now stand out as amongst the highest both in nominal and real terms in emerging markets offering more support for the lira. It was notable recently that the lira proved resilient to the move higher in US rates.” 

“Governor Agbal has outlined plans to overhaul FX policy by stating that the CBRT will no longer sell US dollars to support the lira. Turkey will now seek to strengthen FX reserves gradually.” 

“Turkey’s economy is expected to rebound strongly by around 6.0% this year.”