USD/TRY Pauses Around 15.50 as Markets Mull Potential End to CBRT Easing

CBRT Statement Analysis:

• Little changed in the statement RE assessment of inflation as transitory and driven by supply-side factors. The key change was in room for further easing which the bank says it has now completed the use of the limited room – implying an end to the cut cycle in the near-term.
• The CBRT will likely keep rates on hold in 1Q22 to observe the impact of the 500bp in cuts and will likely be hamstrung by surging inflation – leading to rate hikes or unconventional measures to curb speculation and TRY liquidity.
• Erdogan’s comments in the coming weeks will be interesting to gauge, to see whether he has reversed course on his ambitions for lower rates into 2023 – or whether this was driven predominantly by CBRT officials.

Markets:

• The initial announcement was met with TRY selling, pushing USD/TRY above 15.50.
• While the end of the easing cycle should lend some support to TRY to potentially slow the current speed of depreciation, deeply negative real rates set against in a tightening external environment should continue to support selling pressures over the medium-term in the absence of moves to re-establish positive real rates.