The Central Bank of the Republic of Turkey (CBRT) MPC delivered a surprise 100 bps rate cut taking the official policy rate to 13.00% which has led to only a relatively modest weakness of TRY with USD/TRY advancing by around 0.5% on Thursday. Economists at MUFG forecast the USD/TRY pair at 20 by the first quarter of 2023.

CBRT surprises with rate cut

“The limited degree of USD/TRY fallout in part reflects the fact that the statement from the MPC suggested this could be more of a one-off’. The timing probably also reflects the fact that more recently long-term yields in Europe and the US have declined by between 50-60 bps. That said it might not take long to see bigger moves higher in USD/TRY if long-term yields elsewhere creep further higher.” 

“The TRY will continue to weaken going forward. Coupled with the huge and increasingly negative real yield, Turkey’s current account deficit is widening. Moody’s expects the budget deficit to worsen also, to around 4.5% of GDP with the FX deposit-protection scheme becoming increasingly expensive. That is estimated to cost 2.2% of GDP, a cost that will increase as USD/TRY rises.” 

“We currently forecast USD/TRY to hit 20.00 by Q1 2023 – an 8% increase. But we are leaning toward a broader upgrade of our USD forecasts which would open up the probability of that level being hit sooner.”

 

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