USD/TRY: Conditions may not be yet in place for a sustained Lira rebound – MUFG

Turkish Lira surged higher by around 7.7% against the US Dollar following the Central Bank of Türkiye (CBoT’s) latest policy meeting. Economists at MUFG Bank analyze TRY outlook.

CBoT delivers large hike helping to restore investor confidence

CBoT delivered a much larger than expected rate hike of 7.50 percentage points that lifted the policy rate up to 25.00%. The policy rate has now been increased by 16.50 percentage points in total since June, and now exceeds the peak from back in 2018 and 2019. 

Higher rates should again begin to offer more support for the Lira after the larger hike helped Turkey to regain policy credibility. Investors will now have more confidence in the shift back to more orthodox policy settings that have been taking place since the elections in May. 

We expect the CBoT to deliver further larger hikes at upcoming policy meetings to lift the policy rate closer to 35.0%. At the very least the developments should slow the pace of further Lira depreciation through the rest of this year and pose downside risks to our USD/TRY forecasts, although we are not convinced yet that conditions are in place for a sustained rebound.