Turkish policymakers too sanguine on external vulnerabilities

The decision by Turkey’s central bank to cut its overnight lending rate, which forms the upper bound of the corridor in which market rates are allowed to fluctuate, suggests that it is becoming less concerned about the economy’s external vulnerabilities. We think that this could prove complacent. The vagaries of Turkey’s interest rate corridor mean that policy rates often give little guide as to overall monetary conditions but in general we think that market interest rates will have to rise over the coming year.