Too l ttle and (above all) too late

Dünya Executive - - REPORT - Esther Re chelt, analyst, Commerzban­k

If the risk environmen­t or the pressure on the

USD do not change rapidly it seems just a matter of time, and a short period of time at that, before USD-TRY breaches the 5.00 on a sustainabl­e basis. Nobody expects the CBRT to react to renewed TRY depreciati­on with a significan­t rate hike. Thanks to President Recep Tayyip Erdogan’s interview previous week, even the most optimistic person must now have realized that the Central Bank is under enormous political pressure to keep interest rates low. In view of these facts it does not matter that the Central Bank nonetheles­s hiked its key rate by 300bp but what matters is the fact that it only did so after its currency had depreciate­d by over 15 percent (since the last rate hike). By doing that, it signaled very clearly that it will only stand up to the political pressure when the pressure from the financial markets becomes unbearable. And this pressure will rise again. As the CBRT has not managed to correct the collapse of the TRY, market participan­ts have to expect a notable rise of the inflation rate over the coming months.

This will quickly “eat up” the higher interest rates. What is left is a higher nominal interest rate but a continued low real interest rate. (May 25)

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