Goldman Sachs: The Need To Anchor Expectations

Goldman Sachs note that "the steady depreciation of the TRY has continued in Oct, even after the surprise 200bp hike in the 1-week repo rate in late Sep. At that time, we argued that while the hike was an encouraging initial step towards moving the real rate to a higher level, and would likely lower the risks of an imminent sharp and discontinuous move, more tightening would be needed to anchor local expectations in light of the persistent inflation slippage and pro-growth bias of policy. Since then the pressure on Lira has remained steady rather than accelerate, and USD/TRY has moved past our 3m forecast of 7.75 and is now approaching our 6-month forecast of 8.00. Accordingly, we are rolling our forecasts to 8.50, 8.75 and 9.00 in 3-, 6- and 12-months, reflecting a steady pace of depreciation consistent with the main 'soft-landing' scenario from our economists - which envisage the TCMB raising the policy rate (one-week repo rate) to 17% by the end of the year. Currently, the policy rate is at 10.25% but the marginal funding rate is at 13.25%, so the additional tightening would be 375bp (relative to the marginal funding rate). A risk scenario where the necessary rate adjustment is delayed would likely lead to even more front-loaded currency depreciation and market volatility."