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The CBRT is faced with some difficult choices as lira depreciation in the face of ultra-loose monetary policy sparks concerns of a protracted currency crisis in Turkey.
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- The CBRT is facing an acute currency crisis with markets now anticipating emergency hikes or FX interventions & unconventional policy tools as the lira devalues at an accelerating clip on ultra-loose monetary policy settings.
- De-anchored expectations, alongside increased dollarisation and weak monetary policy credibility, continue to provide snowballing risks to the inflation outlook and further TRY weakness in the absence of real policy rates.
- With 2018 in mind, the establishment & maintenance of real policy rates provides a potential solution, but clashes with Erdogan's political ambitions ahead of 2023 elections - placing a theoretical cap on emergency hikes around +400-500bp
- Turkey's policy difficulties are likely to continue as long as Erdogan remains in power with sole control over the leadership structures at the CBRT - keeping TRY assets in a self-fulfilling cycle of depreciation until a credible policy framework can be established.
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