CBRT may further lower rates; USD/TRY likely to trade at 3.25 by 2016-end

The Turkish government has already exerted pressure on the central bank to lower interest rates. Since the start of 2016, the Turkish central bank has lowered the upper-end of its rate corridor by 200 basis points. Given the imminent uncertainty and also the expected negative implications on growth, the CBRT is expected to looser policy further, noted Commerzbank in a research report. The average funding costs for banks is likely to drop another 150 basis points.

However, an easy monetary stance, reflected in the low real interest rate, would not support the Turkish lira, added Commerzbank. Unsecure politics is expected to add to the volatility. However, as the US Fed continues to be on a moderate course, the lira is likely to be modestly weak in the next twelve months, according to Commerzbank. As the markets understand wider risks, another lira crisis is unlikely to take place as it had happened in 2014/15, even if individual events continue to shock, said Commerzbank. The current account of the nation is expected to be helped by the slower growth.

“We see USD/TRY at 3.25 at end-2016 and at 3.40 at end-2017”, stated Commerzbank.