Turkish Lira: Rate cuts raise depreciation risks - Commerzbank

Commerzbank's analyst Tatha Ghose anticipates the Central Bank of the Republic of Türkiye (CBRT) to reduce interest rates once more following a seemingly modest inflation report. Ghose asserts that disinflation is not genuine and that regional trends are pro-inflationary. Despite the Turkish Lira (TRY) remaining overvalued in real terms and nominal depreciation trailing inflation, Ghose cautions that additional easing heightens risks, projecting USD/TRY to reach 52.0 by year-end.

Turkey's central bank (CBRT) is set to announce its rate decision later today, with analysts nearly uniformly predicting a 100 basis points cut in the 1-week repo rate, from 37.0% to 36.0%. The latest (apparently favorable) inflation data provided the ideal backdrop for CBRT to keep cutting rates, yet our assessment is that inflation is not genuinely on a downward trajectory.

September headline inflation tumbled to 29.7% year-over-year, and for once, the seasonally-adjusted month-on-month increase also showed a significant decline. However, we have previously argued that this could merely be a temporary phenomenon, not the start of genuine disinflation. The investment fund crisis adds a layer of caution, although recent data suggests that withdrawals were mostly converted into lira deposits rather than foreign currency.

Therefore, it is unlikely to impact monetary policy or forestall today's cut. The lira continues to depreciate steadily, showing no sign of respite. CBRT Governor Fatih Karahan recently tried to portray this as a voluntary approach to avoid even steeper devaluation in the future, an assertion we strongly disagree with. With nominal depreciation projected at around 20% annually, compared to inflation in the 30%-35% range, the real exchange rate continues to appreciate.

Thus, the lira is not inching closer to fair-value or equilibrium in any meaningful manner. Rate cuts only amplify the risks. We forecast USD/TRY to trade at 52.0 by year-end.