TRY: The price of central bank independence – Nordea Markets

Tatiana Evdokimova, Chief Economist at Nordea Markets, points out that TRY is bleeding after the central bank surprises the market keeping the key rate unchanged yesterday and will likely remain under pressure until central bank’s credibility is restored.

Key Quotes

“The central bank has surprised the markets with an "on hold" decision keeping the key rate at 17.75% while a widely shared consensus pointed at a 100 bp hike for yesterday's meeting.”

“Since the beginning of the year TRY remains second worst performing EM currency after ARS, loosing more than 22% vs USD. A pause in the tightening cycle while inflation keeps on accelerating (15.4% y/y in June) questions the independence of the central bank and confirms worries that the central bank will get under more pressure to keep rates lower and thus to support growth.”

“The credibility of the central bank that seemed to be slightly improved by the latest emergency hikes is now damaged again and the cost of repairing it after yesterday’s move is likely to increase.”

“Signs of further tightening of Erdogan’s control of the central bank and rising macroeconomic imbalances could increase risks of sovereign rating downgrades and course further speculative attacks on TRY in order to test central bank’s ability to withstand the pressure.”

“Limited ability of a central bank to combat inflation pressure at a time when EM sentiment in general remains quite negative makes the situation for TRY potentially more threatening.”