Turkish Lira: High carry stays attractive as easing delayed – ING

ING’s Frantisek Taborsky expects the Central Bank of the Republic of Türkiye (CBRT) to keep its 37.00% rate unchanged, with geopolitical tensions, Oil above $90 and tariff changes limiting scope to absorb higher energy costs. He anticipates cautious liquidity conditions, hawkish guidance and a meeting-by-meeting approach, with rate cuts resuming in Q4 toward 35.00% while Turkish Lira (TRY) remains attractive thanks to carry and reserve accumulation.

Turkish Lira carry appeal persists

"The Central Bank of Turkey is likely to leave rates unchanged at 37.00% today. The policy outlook has shifted in recent days, both because of geopolitical tensions which have pushed oil prices above $90/bbl, and a decision to gradually unwind a sliding scale tariff mechanism, which reduces the room to absorb the impact of higher oil prices, despite measured regulated price hikes."

"This backdrop will likely lead the central bank to be more cautious in easing liquidity conditions. While markets see some chance of the CBRT restarting one-week repo auctions at 37% today, we expect funding to remain at the upper end of the corridor for an extended period."

"We also expect hawkish guidance, with the CBRT stressing a meeting-by-meeting approach rather than opening the door to a rate-cutting cycle."

"The rates market has seen only a little repricing with the re-escalation of the US-Iran conflict compared to previous months. The market is roughly pricing in a reduction in the effective rate to 38.50% today and matching the key rate from October this year. "

"Although we do not expect a restart of auctions at today's meeting, we expect the CBRT to return to rate cuts in 4Q, taking rates to 35.00% at the end of the year."

"On the FX side, the situation looks more optimistic with the CBRT accumulating reserves in recent weeks and at the same time essentially returning long positions in the TRY market to previous highs. The market clearly agrees with our view that despite the thinning carry, TRY remains an attractive currency, which is unlikely to change in the near future."

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