USD/TRY: Risk of sharper Lira sell-off on CBT hesitation – Commerzbank

Commerzbank’s Tatha Ghose reviews the Turkish Lira (TRY) outlook ahead of the Turkish central bank’s (CBT’s) key rate decision. He notes inflation expectations for 2026 have risen and that officials appeared hesitant to signal hikes despite depleted reserves. The bank still expects a significant tightening step, warning that failure to deliver could trigger a sharper USD/TRY move as markets reprice Lira risk higher.

Crucial CBT decision and Lira risk

"As we head into the week of the Turkish central bank’s (CBT’s) crucial rate decision, here are some thoughts further to our comment of last Thursday."

"Market participants lifted their year-end 2026 inflation expectation to nearly 28%y/y from 25%y/y in March, according to CBT's latest survey. This upward revision was driven by the fallout from the Iran war for sure. But, expectations were on their way up for some months prior as well."

"CBT governor Fatih Karahan and FinMin Mehmet Simsek reportedly met investors at the sidelines of the IMF conference where they signalled hesitation about hiking rates. At least that is how the audience interpreted their remarks. Given how much reserves CBT has lost trying to intervene and stabilise the lira using ad hoc measures, one might have imagined that they would be ready to signal decisive rate hikes."

"We still foresee a significant monetary tightening step on Wednesday, but if this were not to occur (because CBT perceives political pressure), that could trigger a sharper lira sell-off. With market participants nudging their year-end USD-TRY forecast higher to 51.23 from 50.97 in April (our forecast: 55.00), with the 12-month forward expectation moving up to 53.62 from 52.70, a broader repricing of lira risk is underway."

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