Turkey's FX outlook

Turkey's inflation increased in September, climbing to 7.95% y/y from 7.14% a month earlier. The upward inflation pressures stem so far from the lira's continuing slide due to political uncertainty and the prospect of the Fed's upcoming tightening. 

A moderation is not yet seen in inflation expectations from the lira's recent short-lived rally. Over the past year, the Turkish central bank (TCMB) has found itself in a tight spot. Given the significant pressure on the exchange rate and high inflation, a cautious monetary policy stance is needed. 

However, in the run up to the summer 2015 elections the central bank was under significant political pressure to ease monetary policy in order to help heavily leveraged local companies and support economic growth. 

On 21 October, the Turkish central bank (TCMB) kept its policy rate unchanged at 7.50% as expected. However, given the high inflation outlook, the policy rate has turned slightly negative.

"The TCMB could continue to be under political pressure at a time when vigilance is needed. As stated above, a coalition between AKP and CHP with a strong economic team in charge of economic policy making may help moderate political pressure on the central bank", says Danske Bank. 

The unstable lira, accelerating inflation and global EM volatility may well trigger an emergency rate hike from TCMB as the Fed's imminent tightening approaches.