The Turkish central bank’s tight monetary policy and hawkish communication continue to support the TRY. Given the current inflationary panorama and short-term upside risks, the CBRT is likely to maintain its hawkish narrative when it convenes on Thursday 18 February. Although a small rate hike is anticipated by some market participants (Bloomberg consensus), HSBC Economics thinks the CBRT is more likely to keep its policy rate unchanged at 17.0% and repeat its readiness to tighten further if inflation deviates significantly from its year-end of objective of 9.4%.
Even without a rate hike, we continue to see the TRY strengthening further. Inflation risks have not completely dissipated, with our inflation surprise index trending upward since Q4 2020. However, our conviction is that forthcoming inflation data will not negatively impact the TRY. From an FX perspective, inflation data are mostly backward looking and/or beyond the direct monetary policy scope (e.g. food and energy prices). More importantly, higher-than-expected inflation could be counter intuitively TRY-supportive if the market were to anticipate further rate hikes or a policy rate maintained at a high level for an extended period of time.
Meanwhile, the dynamic of the balance of payments is also turning more favourable for the TRY. The December current account deficit was still wide but the structure of the financing has started to improve with sizeable capital inflows alleviating pressures on the central bank’s FX reserves.
In the month ahead, we believe the current account is likely to narrow via a compression of imports, as suggested by the January data of the Trade Ministry.
Moreover, signs of de-dollarisation have finally emerged. In the past two weeks, residents’ FX deposits have decreased by about USD1.7bn. It is too early to draw strong conclusions, but there could be some reductions in foreign currency holdings as domestic real interest rates stay in positive territory. A positive circularity may even emerge as TRY appreciation may further reduce the demand for foreign currencies.
Overall, we remain TRY-positive and see USD-TRY trending towards 6.50 by year-end.
From TRY, RUB, on the move
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