Despite dramatic depreciation of the lira since early March, the TCMB is likely to continue cutting its benchmark one-week repo rate, now at 8.75%, as it tries to mitigate the sharp contraction in economic activity stemming from the COVID-19 pandemic. It is prioritising disinflationary pressures over threats to financial stability. This will push real rates deeper into negative territory, maintain downward pressure on the lira and fuel concerns about the external indebtedness of Turkey’s corporate sector.
A likely requirement for cherished infrastructure projects to be axed is one factor behind Erdogan’s resistance to an IMF deal.
The risk premium on Turkish dollar-denominated corporate debt is rising -- spreads have risen by 400 basis points in three months.
Cheap oil is contributing to a sharp decline in Turkish inflation: the headline rate is likely to drop into single digits by July.
