Goldman Sachs Group Inc improved its outlook for the lira for a second month but said the Turkish central bank’s plan to rebuild reserves will probably even out the currency’s gains.
After a shift in approach outlined by central bank Governor Naci Agbal, “markets are likely to give policy makers, but especially the lira, benefit of the doubt, given its roughly 15% nominal annualised carry, and the broader dollar bearish environment,” Goldman analysts led by Zach Pandl said in a report to clients.
The US bank now forecasts the lira’s exchange rate against the dollar at 7.50, 7.75 and 8.00 in three, six and 12 months, respectively. That compares with 7.75, 8.00 and 9.00 previously.
The lira is among the world’s best performers against the dollar since early November; it gained for a fourth straight day on Friday, ending the week at 7.6232 against the US currency. Turkey’s central bank is set to raise its key interest rate by 2 percentage points on December 24, according to Goldman, after a 475 basis-point hike in November; most economists surveyed by Bloomberg predict a smaller increase in the benchmark to 16.5% from 15%.
Turkey’s central bank chief has promised to go all in to curb inflation and build up national reserves, continuing a shift to the monetary policy mainstream following a year of rapid rate cuts by his predecessor that resulted in rapid credit growth and a weak currency. 
A key element of next year’s policy mix will be to amass foreign reserves without destabilising the lira, Agbal said last Wednesday.
The effort will likely result in “a stable currency path” instead of “outright strength against the dollar, given still high inflation and political risks,” Goldman’s analysts said, warning that any missteps could trigger a market backlash.