Turkish Lira Approaches the Lows Again, CBRT Sounds Dovish

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The Turkisk Lira fell against the Euro, Dollar and Pound after its central bank hinted at the need to cut interest rates in the near-future.

Leaving the policy rate at 50%, the CBRT said, "monetary policy tools will be used effectively" in the future to bring down inflation. Analysts point out that this assessment represents a change in tone, as the central bank previously said "monetary policy stance will be tightened" in case of a significant deterioration in inflation.

"The bank smoothed its tone by changing the statement that monetary policy will be tightened when necessary to that monetary policy tools will be used effectively," says Adem Ileri, Principal Economist at BBVA Research.

"That appears to be slightly more dovish language and removes a tightening bias from the statement," says Nicholas Farr, Emerging Europe Economist at Capital Economics.

The Pound to Lira is 0.42% higher on the day at 45.18, the Euro to Lira exchange rate is half a per cent higher at 37.97 and the Dollar to Lira is 0.22% higher at 34.01.

Also cited as being evidence of a 'dovish' steer is a more constructive interpretation of Turkey's inflation dynamics. The central bank now thinks inflation "is assessed to have displayed no discernible change in August", whereas previously, it noted an "increase" in the rate of price appreciation.

BBVA thinks Turkey's headline inflation rate will decrease to 43% by the end of 2024, "which could create room for the CBRT to consider to start a gradual easing cycle," says Ileri.

However, he adds that high inflation expectations and uncertainties stemming from wage and price adjustments at the beginning of 2025 require a cautious stance. "Therefore, we have shifted our first rate cut expectation from November to December, with a 250 bps cut while anticipating credit growth caps, especially on consumer loans, to continue for a while."

Capital Economics thinks the CBRT will want the disinflation process to progress further before turning towards monetary easing.

"We expect inflation to fall more slowly than the CBRT expects over the rest of this year (our end year forecast is 45% versus the CBRT’s forecast of 38%). And we maintain our forecast that the first interest rate cut won’t arrive until early 2025," says Farr.

The Lira's pace of depreciation stalled in August-September, but the risk is that the march lower resumes if the market becomes increasingly confident the central bank is readying to join its peers in cutting rates.