Market Is Resigned to Downshift in Turkish Rate Hikes

Turkey’s first interest-rate hike in over two years was a lesson for economists who widely expected a more aggressive pivot by the central bank from an era of ultra-loose monetary policy.

(Bloomberg) — Turkey’s first interest-rate hike in over two years was a lesson for economists who widely expected a more aggressive pivot by the central bank from an era of ultra-loose monetary policy. 

One month on, the world’s biggest lenders are revising down forecasts for the next move of policymakers led by Governor Hafize Gaye Erkan. Deutsche Bank AG and Barclays Plc both cut their calls by 2 percentage points in recent days and now see the central bank raising its benchmark to 18% from 15%.

Though unanimous in predicting another rate hike on Thursday, many respondents in a Bloomberg poll envisage an increase of around half the size of June’s 650 basis-point step. Forecasts range from ING Groep NV seeing a move of 5 percentage points to HSBC Holdings Plc anticipating just 2 percentage points of tightening.

The approach that’s taking shape reflects the worry over risks to financial stability and concern about the impact a rate shock could have on the $900 billion economy. But as the central bank enacts policy changes it described as “gradual,” Turkish assets remain vulnerable to a selloff and price pressures continue to build with inflation still near 40% in annual terms.

A hike of anything less than 500 basis points “could well lead to renewed pressures on the currency,” Deutsche Bank analysts Christian Wietoska and Yigit Onay said in a report. They revised their call for Thursday “on the back of the recent more stable currency, gradually rising FX reserves and a lower-than-expected inflation print.”

In unwinding years of unconventional policies, President Recep Tayyip Erdogan’s new economic team is scaling back support for the lira, rebuilding foreign reserves and simplifying regulations that were used to stabilize the Turkish currency. Erdogan has also looked for financial help abroad, visiting the Gulf Arab region this week and securing provisional deals with the United Arab Emirates that could be worth more than $50 billion.

At the same time, authorities are moving ahead with fiscal measures that Barclays said are “stronger than we previously expected.” The new steps — which range from increases in several value-added tax rates to higher corporate levies for banks — became necessary in part to pay for costly promises made to voters by Erdogan before May elections.

“The authorities might be planning to compensate for less than ideal tightening on the monetary policy side by tighter fiscal policy,” Barclays economist Ercan Erguzel said in a research note.

What Bloomberg Economics Says…

“We expect the central bank to continue its much-needed policy flip at its July meeting with a 300 basis-point rate hike. Looking ahead, it’s also likely to take additional steps to continue unwinding its complex set of policies.”

— Selva Bahar Baziki, economist. Click here to read more.

The balancing act will grow even more tricky with the approach of local elections next March. Faster economic growth could again become a priority as Erdogan focuses on trying to wrest some of the country’s biggest cities from the opposition.  

Already voices in pro-Erdogan media are clamoring for an even bigger downshift in monetary tightening. A columnist at Hurriyet newspaper who’s close to government thinking cautioned against decisions that could hurt investment and businesses, saying this week the central bank may only bring its key rate to 16.5%-17% on Thursday.

In the backdrop, the lira is trading near record lows in a further threat to inflation. The Turkish currency has lost over 30% of its value this year, the biggest depreciation in emerging markets after Argentina’s peso.

Under Erkan’s predecessor, the central bank was projecting that price growth would end the year at 22.3%, an outlook likely to be revised higher next week when the central bank unveils its new quarterly inflation report.

The presentation will effectively mark Erkan’s public debut since the new governor has so far made only sparse remarks about the direction of monetary policy.

For Cagri Kutman, Turkish markets specialist at London-based KNG Securities, the country’s political challenges will continue to shape its economic policies, with elections just months away.

“That’s why my expectation is that the hikes would be finished before the end of the year,” he said. “And I don’t personally expect rate hikes near local elections in March.”

–With assistance from Harumi Ichikura.

(Updates with UAE deals in sixth paragraph.)

More stories like this are available on

©2023 Bloomberg L.P.