Turkey: Allow the lira to trade freely to prevent USD/TRY from rallying to 10 or even higher – Rabobank

Every day brings more evidence that Turkey is getting very close to a critical juncture. Economists at Rabobank reiterate three choices that Turkey will have to choose. USD/TRY is trading at 7.1481. 

Key quotes

“Reverse interest rate cuts and raise the policy rate back to 24% or even higher to stabilise the lira and prevent a complete exhaustion of FX reserves  – this option seems very unlikely.”

“Impose very drastic measures that would substantially limit capital outflows and curtail demand for the dollar amongst locals – the latest decisions imply that Turkey is shifting towards this option.”

“Allow the lira to trade freely without the regular FX interventions that led to a sharp fall in FX reserves over the past few months.”

“We remain of the view that the third option would be the most market-friendly and the most rational. However, it would have to be accompanied by a critical element of comprehensive structural reforms overseen by the IMF to prevent USD/TRY from rallying precipitously to 10 or even higher level.”