USD/TRY consolidates in 12.00 area, no sign of hawkish CBRT policy shift to address inflation/lira weakness just yet

• USD/TRY is consolidating around the 12.00 level on Thursday.
• The CBRT minutes, as well as a meeting of CBRT, bank regulators and Turkish banks, was ignored.
• The bank isn’t showing any signs of a hawkish policy shift just yet, but strategists remain hopeful.

After a highly volatile few weeks, USD/TRY is finally able to take a breather on Thursday amid thin liquidity conditions given US market closures. The pair has spent most of the day consolidating around the 12.00 level and current trades lower by about 0.5%.

The pair hit record highs close to 13.50 earlier in the week as Turkish President Recep Erdogan defended his pressure tactics on the CBRT, where he is essentially forcing them to cut interest rates despite surging inflation. But speculation has built that, amid the lira’s tumble (it is now lost nearly 40% of its value versus the US dollar this year), a policy response will be forthcoming.

The minutes of last week’s CBRT policy meeting were released on Thursday. To recap, the bank opted to cut interest rates by a further 100bps to 14.0% (taking total cuts since September to 400bps) last week. The minutes did not impact the lira and contained the usual empty promises; the CBRT said will continue to use all available instruments decisively until inflation falls back to the bank’s medium-term 5.0% target.

Meanwhile, officials from the CBRT, Turkish bank regulators and Turkish banks met on Thursday. Following the meeting, the CBRT governor said that the banking sector was very strong and that he had informed banking officials about recent rate cuts. The discussions were routine, governor Şahap Kavcıoğlu said and surrounded on general evaluations on the economy and banking sector.

Those hoping that the meeting might have resulted in an immediate hawkish turnaround in CBRT policy in wake of the lira’s recent sharp depreciation were left down. Still, many analysts expect that over the coming months, as inflation continues to accelerate in Turkey, the CBRT will have its hands forced and rate hikes will eventually be forthcoming.