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The central bank of Turkey is expected not to slash interest rates this year, although there is no aim to raise rates either. CBT will delay tightening policy and will attempt to calm things down by tweaking FX liquidity measures, which will likely not work.
Unless markets calm down soon, USD-TRY could continue to spike, and this will trigger another negative spiral between exchange rate and inflation. CBT is likely to be pushed into a corner by the widening interest rate differential. It is one of the only remaining central banks around EM which is viewed by market participants as unable to hike rates because of political pressure.
The lira weakened sharply last week, with USD-TRY surpassing 3.27 at one stage on Friday.
Meanwhile, at USD-TRY of 3.25, imported inflation pass-through will escalate to faster than 10 percent by next month (via a combination of year-on-year acceleration in commodity prices and change in the lira), Commerzbank reported.
