Commerzbank’s Tatha Ghose expects the Central Bank of the Republic of Türkiye (CBRT) to cut rates again after a seemingly benign inflation print, arguing that disinflation is not genuine and regional trends are pro-inflationary. With the Turkish Lira (TRY) still overvalued in real terms and nominal depreciation lagging inflation, Ghose warns that further easing raises risks and forecasts USD/TRY at 52.0 by year-end.

Rate cuts and real exchange rate

“Turkey’s central bank (CBRT) will announce its rate decision later today: analysts nearly unanimously forecast a 100bp rate cut of the 1-week repo rate from 37.0% to 36.0%. The latest (apparently good) inflation print created the perfect background for CBRT to continue cutting rates, when in our view, inflation is not truly on a down-trend at all.”

“September headline inflation fell to 29.7%y/y, and for a change, the seasonally-adjusted month-on-month increase also decelerated noticeably. But, we have argued before that this could prove to be a one-off rather than the beginning of genuine disinflation.”

“The investment fund crisis provides some reason for caution too, although recent evidence suggests that withdrawals were mostly transferred into lira deposits rather than FX. Therefore, it is unlikely to interfere with monetary policy or prevent today’s cut.”

“The lira continues to depreciate at a steady pace, with no sign of relief. Recently, CBRT governor Fatih Karahan tried to describe this as a voluntary strategy which would avoid a sharper future devaluation. We strongly disagreed.”

“With nominal depreciation annualising to around 20%, compared with inflation in the 30%-35% region, the real exchange rate is still appreciating. Hence, the lira is not moving closer to fair-value or equilibrium in any meaningful sense. Rate cuts only increase the risks. We expect USD/TRY to trade at 52.0 by year-end.”

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)