Economists at the world’s biggest lenders have a lot of catching up to do in rewriting forecasts for Turkish interest rates after the central bank blindsided the market on Thursday with an unexpectedly steep hike.
(Bloomberg) — Economists at the world’s biggest lenders have a lot of catching up to do in rewriting forecasts for Turkish interest rates after the central bank blindsided the market on Thursday with an unexpectedly steep hike.
But with the lira coming under renewed selling pressure, policymakers likely won’t stop a monetary tightening cycle that already delivered the biggest rate increase in years to lift Turkey’s benchmark by 7.5 percentage points to 25%.
Global banks from Morgan Stanley to Barclays Plc and JPMorgan Chase & Co. now say rates will reach at least 30% by the end of the year, reflecting expectations of a massive shift from the central bank’s earlier guidance of “gradual” tightening.
The Turkish central bank “delivered a major positive surprise,” Barclays analysts said in a report on Friday. “This flies in the face of the commonly held analyst/market view that the policy rate is psychologically capped at 25%.”
The emerging outlook is aligning with market expectations that monetary policy should be much tighter still.
The Turkish currency’s overnight indexed swaps — derivatives used to bet on future borrowing costs — are showing expectations for higher rates ahead. The one-year contract spiked to 33.5%, the highest level since before elections in May, from 28% on Wednesday.
“We believe the Turkish central bank’s move was important in terms of limiting the volatility in FX,” said Mustafa Oner, an analyst at ICBC Turkey Investment. “It is a positive and effective action for the short-term.”
Read more: Supersized Rate Hike Spurs Massive Rally Across Turkish Markets
The surprise decision already appeared to carry less sway with traders on Friday, with the lira weakening as much as 2.7% against the US dollar. It’s the worst performance across emerging markets, erasing about half of the currency’s gains from Thursday.
The challenge for policymakers now isn’t only to appease investors but also to ensure they still have the support of President Recep Tayyip Erdogan.
Erdogan, a self-styled enemy of high borrowing costs, has chased out three central bank governors since 2019, spurring an exodus of capital that has weighed heavily on the lira.
The president appeared to be trying a new tack since his reelection in May, appointing officials that favor more conventional measures to steer the economy.
Uncertainty will keep the market guessing until Erdogan weighs in.
The “rate hike was commendable, but it has delivered us to a point where we have to watch out for reactions from Erdogan,” Tatha Ghose of Commerzbank AG said in a report. “The pessimistic scenario is where deeply entrenched inflation takes longer to respond, and meanwhile, Erdogan loses patience and declares that high interest rates do not work.”
–With assistance from Tugce Ozsoy.
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