Today, Turkey’s central bank (CBT) is set to announce its monthly rate decision, with analysts unanimously predicting that the rate will remain unchanged at 50%. However, behind the scenes, the Turkish Lira (TRY) has been rapidly depreciating, even against the weak US dollar (USD), according to Commerzbabnk’s FX strategist Tatha Ghose.
Ghose notes, “If we calculate the annualized rate of depreciation based on the average daily change since the beginning of July, we get 26%; if we repeat the same calculation but starting more recently on 1 August, we get 36%. This recent acceleration is concerning and reportedly required FX intervention by state banks to control it.”
Despite the central bank’s efforts to sterilize liquidity, the trend of Lira depreciation continues unchecked. In addition, inflation expectations remain stagnant. Recent surveys also indicate growing dissatisfaction among the electorate with the economy, leading to calls for an early election. If the CBT were the sole economic policymaker in Turkey, urgent action would be needed to address these issues.
Merely promising that inflation will moderate in the second half of the year is not sufficient, as markets see through the superficial nature of current improvements. It is essential for other policymakers in Turkey to also contribute to fiscal contraction and establish complete credibility. Without a comprehensive approach, any rate hike by the CBT would be rendered meaningless.
Analysis:
In summary, Turkey’s central bank is expected to maintain its rate at 50%, despite the alarming rate of Lira depreciation and stagnant inflation expectations. The growing dissatisfaction among the electorate with the economy and calls for an early election further highlight the need for comprehensive economic policies beyond just monetary measures. It is crucial for policymakers to work together to address these challenges and restore credibility in the financial markets for meaningful impact on the country’s economy and people’s finances.