TRY: CBT to cut rate despite needing FX interventions – Commerzbank

Turkey’s central bank (CBT) is nearly unanimously expected to cut its 1-week repo rate by 200bp from 43% to 41% at today’s meeting; there are some outside bets for an even larger cut. Just days ago, expectations for the rate cut had been somewhat tempered because August CPI data were not conducive – CPI rose by 2.0%m/m before seasonal adjustment and 2.5% after adjustment, only slightly improved from July. That leaves inflation still running at an annualised 34% rate, far removed from CBT’s year-end target of 24%, Commerzbank's FX analyst Tatha Ghose notes.

Exchange rate to continue depreciating at its current pace

"At the same time, by the looks of it, FX markets remain under daily management. State banks reportedly sold as much as $5bn to stabilise the lira following the court ruling on opposition CHP in Istanbul. The intraday trading pattern has reverted back to flat-lining followed by breach of lines of defense – a telltale sign of active daily interventions."

"CBT would find it difficult to abandon cuts on the eve of what promises to be a politically turbulent autumn. President Tayyip Erdogan recently cited the real economy during an overseas trip, promising to ease economic conditions soon. It is probably clear to CBT management as well as Minister Simsek that Erdogan will have limited appetite to be informed that policies may have to go into reverse gear (i.e. more restrictive), once more. This is not concrete information, but we _sense_ that CBT may not feel that it has much leeway in this respect any longer. "

"In conclusion, CBT will probably have to continue cutting rates even though underlying inflation indicators may not really be slowing down convincingly, and the lira is requiring active defense. We forecast the exchange rate to continue depreciating at its current pace, which annualises to around 42% on a basket basis."