W ll the market ask for more?
We recently postulated that increased macro vulnerabilities, heightened fragility of corporate balance sheets amid TRY weakness, and eroding household confidence in the lira would eventually force the CBRT to defend the currency. We believe that TRY movements and global risk-appetite will be the key determinants of CBRT policy action at the June 7 meeting. Such action could take several forms: for example, the CBRT could make differentiated adjustments to its remaining policy rates to achieve asymmetric interest rate corridor around the one-week repo rate. It could also raise all policy rates, potentially setting the one-week repo rate, currently at 8.00 percent, much closer to where the LLW O/N lending rate is now (16.5 percent) while pushing the LLW O/N lending rate further up. While any of these scenarios should provide relief to the TRY in the runup to the June 24 elections, we believe that what is required to reassure markets is a clear: a credible medium-term framework that addresses on-going economic overheating and policy uncertainty. (May 25)