How will policymakers respond to the falling lira?

If strains in Turkey’s balance of payments fail to ease, the central bank will probably tighten monetary conditions more aggressively within the interest rate “corridor”. But use of the corridor alone would not allow real interest rates to return to positive territory and therefore may not be enough to shore up the currency. We suspect that policymakers would then turn to import tariff hikes and capital controls and only increase official policy rates as a last resort.