USD/TRY likely to trade at 3.25 by 2016-end

The Turkish government has exerted pressure on the central bank to aggressively lower interest rates. Since the start of 2016, the CBRT has lowered the upper-end of its rate corridor by 200 basis points. At the start of August, the central bank put in additional liquidity easing measures. Given the backdrop of the imminent uncertainty and the likely negative implications on growth, the Turkish central bank is expected to further loosen policy, said Commerzbank in a research report.

The average funding costs for banks are likely to further fall by additional 150 basis points.

Given such a loose monetary stance, which is seen in the low real interest rate, it is unlikely to be lira supportive, noted Commerzbank. Moreover, unsecure politics is likely to contribute more to the volatility. However, as the US Fed continues to be on a moderate course, modest lira weakness is expected in the next 12 months, added Commerzbank. As the markets note the wider risks, it is unlikely that another lira crisis, such as in 2014/15, would take place, even of individual events continue to shock.

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