The Turkish central bank (TCMB) yesterday after its second emergency monetary policy meeting in just a month that it had decided to hike its key policy by another 225bp to 17.25% - more or less in line with expectations. Furthermore and equally important the TCMB announced that it plans to intervene in the FX market to prop the ailing lira.

Hence, the TCMB continues to act decisively to stop the lira from weakening and to reduce inflationary pressures. We continue to be impressed and believe the TCMB will eventually succeed and we are getting closer to stabilisation of the lira - and setting it up for a potentially strong rebound. However, the situation remains fragile even though we think we are moving towards more stability.

We expect the TCMB to move very decisively today and intervene heavily in the FX market to show that it is not a one way street for the lira. We would expect the lira to strength somewhat today.

The recent turmoil in the Turkish markets is primarily a reflection of a worsening of global financial conditions. Hence, the development in these conditions will also be key to when they Turkish markets will stabilise. Therefore, Thursday’s rate decision from the Federal Reserve will be watched very closely by the Turkish markets.

In the coming days we will revise our forecast for the Turkish markets. We will clearly not rule out more rate hikes in the coming months as we would expect inflation to rise significantly due to the strong sell-off in the lira.

SOURCE: Danske Bank