TRY: Expectations show inflation risk is elevated – Commerzbank

There are risks associated with continued rate cuts from the Turkish central bank (CBT) against a background of re-accelerating inflation expectations. Household inflation expectations once again recorded an acceleration, with the 12-month forward expectation accelerating to 54.4% in October. This increase is attributed to administrative price hikes and persistent food price acceleration. Whatever may be the reasons, households remain unconvinced that inflation will decline towards target, Commerzbank's FX analyst Tatha Ghose notes.

CBT reduces the relative attraction of TRY deposits

"Political uncertainty could be rising: the Nationalist Movement Party (MHP)'s boycott of the Presidential reception came as a surprise, and is signalling some coalition strains. Differences between President Tayyip Erdogan and MHP leader, Devlet Bahceli, over the peace process and Cyprus elections highlight potential concerns about internal cohesion and policy coordination. The net open FX position of non-financial companies widened by 1.6%m/m to $184.9bn by the end of August, reflecting a faster expansion on the liability side."

"On the topic of FX assets and liabilities, it is worth noting that contrary to frequent claims by policymakers, Turkey's foreign exchange reserves are not that high at all. Reserves net of FX RRR are only $12bn and have been dropping since the summer. Some officials make the disingenuous claim about reserves being high by citing the gross international measure which includes gold – and what we are seeing there is just the increase in gold valuation."

"In conclusion, the fundamentals for the lira exchange rate are not improving. Political fragility and market volatility are complicating the central bank's job to maintain a stable lira and avoid dollarisation. By proceeding with a premature easing step against the backdrop of rising inflation risk, CBT reduced the relative attraction of TRY deposits, potentially nudging residents toward additional FX demand."