This morning the Turkish central bank (TCMB) cut rates on foreign currency deposits. The bank cut its 1-week deposit rate on USD-deposits to 4.5% from 7.5% and to 2.5% from 6.5% on EUR-deposits.
The TCMB cited the global downtrend in rates as the reason. However, it is obvious that the timing of cuts has to be viewed in the light of the recent significant sell-off in the Turkish lira.
The lira initially rallied but has been unable to hold the gains and it is clear that more action is needed if the TCMB fundamentally wants to prop up the lira.
However, the possibility for any recovery in the lira in the near term is difficult as the lira is facing significant short-term headwinds.
Danske Bank notes in a report on Monday:
- We would like to highlight the fact that the relatively low level of the oil price is very helpful for Turkey's external position and we do expect a further improvement in the Turkish current account situation in the coming years.
- This combined with the fact that the lira has sold off significantly renders the lira more attractive from a more fundamental perspective, which in the medium term (six to 12 months) should help stabilise the currency.
