Turkey’s Mega Hike Has Most Analysts Cheering, Asking for More

The Turkish central bank’s unexpectedly hawkish interest-rate hike sparked a rally in the country’s assets on Thursday. The move impressed several market watchers, but also prompted questions about what it signals about future policy decisions.

(Bloomberg) — The Turkish central bank’s unexpectedly hawkish interest-rate hike sparked a rally in the country’s assets on Thursday. The move impressed several market watchers, but also prompted questions about what it signals about future policy decisions. 

The central bank, led by Governor Hafize Gaye Erkan and a new lineup of monetary officials, raised the benchmark one-week repo rate to 25% from 17.5%, far beyond the 20% predicted in a Bloomberg survey of analysts. The jumbo hike is the latest indication that Turkey is prepared to move away from unorthodox policies to curb inflation running near 50%. 

Read more: Lira Rallies as Turkey Raises Rates to Near Two-Decade High 

Read more: Citi Closes Long USDTRY Call as Lira Surges After Rate Decision

The lira appreciated as much 7.6% against the US dollar, before closing 5.3% higher on Thursday. The cost of insuring Turkish government bonds against default tumbled the most this month, while an index of local banking stocks jumped almost 10%.

The lira pared some of its gains on Friday, dropping 0.8% against the dollar by 9:01 a.m. in Istanbul.  

Here’s what some market strategists and economists said about the central bank’s move: 

Goldman Sachs strategists:

  • “A clear commitment to moving real rates to positive territory is a prerequisite for the lira to become an attractive carry trade;” the decision “is certainly a more forceful step in that direction compared to the prior gradualist approach.”
  • “That said, to proxy for the tightness of domestic financial conditions we remain more focused on deposit rates, rather than the repo rate.”
  • “We have started to see the first signs of tighter policy working through the system with a large improvement in the current account, which should ease pressures on the FX. However, risks remain as a number of macroprudential measures are still to be unwound and inflation remains elevated.”

Onur Ilgen, head of treasury at MUFG Bank Turkey:

  • “Very important decision, given that the central bank acted beyond expectations for the first time since former governor Naci Agbal; and that reflects on CDS and lira moves.”
  • “The impact of this decision on reducing the pressure on the lira and de-dollarization will likely be seen in the coming period.”

Win Thin, Brown Brothers Harriman: 

  • “It’s really hard to get excited about this hawkish surprise after two straight dovish surprises. Let’s talk after the next decision Sept. 21 and if it delivers another large hike, perhaps things really have changed.”

Simon Harvey, head of FX analysis at Monex Europe Ltd.:

  • “The CBRT’s reaction function under Governor Erkan has been difficult for investors to gauge.” The decision “to increase the pace of more traditional monetary tightening merely adds to this confusion as it follows recent macroprudential tweaks and a string of calls that the transition to a more orthodox framework would be gradual.”
  • “It is difficult to determine whether the 750bps increase in the repo rate is in response to the mounting inflationary pressures or marks an acceleration in the return to a more orthodox framework. It could potentially be both.”

Simon Quijano-Evans, chief economist at Gemcorp Capital:

  • “Great to see the Turkish central bank wake up the global market from its summer lull, showing it’s in charge.”
  • “Most central banks out there currently have negative real rates. Turkey has more, but it’s getting there, one needs to think positive.”

Liam Peach, senior emerging market economist at Capital Economics:

  • “As far as Turkey’s macroeconomic outlook is concerned this could be a game-changer, paving the way for the central bank to take rates to a much higher level and tackle Turkey’s macro imbalances.”
  • “Bringing inflation back to single digits will require a prolonged period of positive real rates, perhaps with interest rates rising above 40%. We’re still not convinced that this will happen, but peak rates above 30% (compared with our previous expectation of 25-30%) is now a much larger likelihood. If this materialises, there’s scope for a lot of the downward pressure on the lira to ease.”

Grzegorz Drozdz, Market Analyst at Conotoxia Ltd:

  • The move “marks another step toward abandoning ultra-loose monetary policy and saving the strength of the Turkish lira. Such dynamic changes piercing most experts’ expectations seem to be a good step to combat rapidly growing inflationary pressures.”
  • Sudden changes in interest rates usually have a delayed effect. Hence, inflationary pressures can be expected to continue.
  • Despite lira rally, Conotoxia expects the USD/TRY to remain above the 27 mark in 2023


–With assistance from Beril Akman.

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