Change of t m ng
Under the old assumptions, we would expect the CBRT to hike its late liquidity lending rate by 100bps on April 25. But this probability has definitely declined following the election announcement. This would all the more be the case if the lira were to anyway rally in the lead up to that meeting. Raising rates now would be viewed as a ‘betrayal’ by Erdogan.
All said however, such a dilemma is ever present whenever the CBRT raises rates – yet the CBRT does raise rates. Depending on lira movements, a rate hike is still possible this week. We do not see a good reason why Turkish assets or the lira rallied on the early election announcement. All the pieces of the puzzle are more or less as they would have been if elections were held on schedule. The rally could have something to do with a broad argument about ‘removal of uncertainty’. Another reason could be that investors expect more quasi-capital controls and interventionist behaviour by policymakers in the future – for example, restrictions on dollarization of the domestic economy – which could support the currency. But, in the end, none of the explanations convince us that the lira should rally at this time. The lira’s fortunes depend crucially on the CBRT’s ability to combat the inflation-foreign exchange spiral here and now. If this ability is reduced, the implication for the lira is clearly negative. (Apr l 20)