TRY: Sterilisation and what else? – Commerzbank

The Turkish lira (TRY) was hardly changed yesterday despite headlines that the central bank (CBT) had added to its liquidity management toolset by buying up liras at one of the locally operated money markets. This was CBT’s first purchase at this specific money market. The effort to sterilise excess liquidity is consistent with MPC guidance that CBT would seek additional liquidity sterilisation steps when appropriate, with the presumed aim of supporting the currency and ensuring pass-through of monetary tightening to bank lending rates, Commerzbank’s FX strategist Tatha Ghose notes.

Policymakers may be forced into harder measures

“The non-response of the lira exchange rate to liquidity tightening measures in recent months must mean that: either such factors are secondary and ineffective because the exchange rate is currently stronger than its fundamental fair-value, and is gradually finding its way to such value; or that other currency-negative factors are popping up around the same time, which is neutralising the liquidity tightening.”

“If we exclude the abrupt weakening following last year’s election, and calculate only over the subsequent, relatively-stable period, the pace of depreciation still works out to an annualised 26%. If this pace were to continue, then in a year’s time, USD/TRY could trade at 45.30. We assume that policymakers would, by then, be forced into harder measures, paradigm shifts, reforms, or more monetary tightening.”

“The latest SONAR survey reportedly shows that an increasing fraction of the electorate wants early elections. And they want this because of dissatisfaction with the economy. While respondents cite a weak economy and high inflation as urgent problems, the reality is that the economy would have to get a lot worse if inflation were to be truly controlled. There has been some base-effect driven superficial disinflation so far, but not much more.”