TRY: Sterilization and what else? – Commerzbank

The Turkish lira (TRY) was little changed yesterday despite headlines indicating that the central bank (CBT) had added to its liquidity management toolkit by purchasing lira in one of the locally operated money markets. This was the CBT’s first purchase in this specific money market. The effort to sterilize excess liquidity is consistent with the MPC’s guidance that the CBT would pursue additional liquidity sterilization steps where appropriate, with the purported aim of supporting the currency and ensuring the transmission of monetary tightening to bank lending rates, notes Tatha Ghose, FX Strategist at Commerzbank.

Monetary policymakers may be forced to take tougher measures

“The lack of 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 towards such value; or that other negative factors for the currency are appearing at the same time, which are neutralizing the liquidity tightening.”

“If we exclude the abrupt weakening after last year’s elections, and calculate only over the relatively stable subsequent period, the pace of depreciation still works out to 26% annualized. If this pace were to continue, then in a year, USD/TRY could trade at 45.30. We assume that policymakers, by then, would be forced to take tougher measures, paradigm shifts, reforms or further monetary tightening.”

“The latest SONAR poll shows that a growing 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 pressing problems, the reality is that the economy would have to get much worse if inflation were to be truly controlled. There has been some superficial base-effect-driven disinflation so far, but not much more.”