Türkiye Watch: Navigating domestic uncertainty

Research evidence excerpt

Türkiye Watch: Navigating domestic uncertainty

Given authorities’ assurances that all necessary steps will be taken to preserve stability

and the relative calm in local sentiment so far, we maintain our baseline forecast of

unchanged rates. This implies the one‑week repo rate at 37% and TLREF hovering

around 40% until August/September. However, we stand ready to revise our call for June

11 depending on incoming news flow and the evolution of FX demand and reserve

pressures following the Eid holiday.

We see the most likely alternative to our baseline as a 300bp hike in the one‑week repo

rate to 40% (from 37%) at the June 11th meeting. This would lift the upper bound of the

corridor to 43% (from 40%), providing the CBRT with additional buffer in the event of a

material deterioration in sentiment or reserve losses tied to domestic or geopolitical

developments.

We continue to forecast end‑year inflation at 30% and the one‑week repo rate at 37%,

although risks have shifted to the upside following recent developments. An outright

rate hike in June would shift our rate path higher for the remainder of the year, relative

to our current expectation of 37% until year‑end.

Reserves sufficient to meet short-term FX demand

Official reserves have partially recovered from their March lows but remain well below

pre-war levels, gross at $169bn (of which $61bn FX, $107bn gold) and net at $37bn,

respectively, as of 15 May.

Liquid FX reserves – defined as gross FX reserves excluding SDR holdings and swaps

with other central banks – stood at $37bn on May 15. However, these could be further

supported through the CBRT’s use of gold/FX swaps and, if needed, direct gold sales in

domestic or international markets. Indeed, we estimate that the CBRT used $19bn of its