Change of t m ng

Dünya Executive - - REPORT - Tatha Ghose, strateg st, Commerzban­k

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)

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