The Central Bank of the Republic of Turkey is widely expected to deliver its first interest rate rise in over two years on Thursday. However, economists are uncertain about how aggressive rate setters will be executing the first hike since March 2021.
An economists’ poll forecasts the central bank to hike by 1150 basis points to 20% from the current 8.5% at Thursday’s meeting.
HSBC look for a 200-bps increase adding that they expected a more conventional approach to FX policy, “with the lira being allowed to depreciate in response to increasingly unfavourable external dynamics, does not necessarily guarantee a conventional approach to interest rate policy, in our view.”
“We pencil in an additional 500bps of tightening for each of Q3 and Q4, which would take the key rate to 30% by year-end,” analysts at the bank wrote.
In what has become the ‘norm’, over the past two years the CBRT has applied unconventional monetary policy to help steer the Turkish economy. Under the approving gaze of President Recep Tayyip Erdoğan, the central has persistently lowered interest rates despite the fact inflation has soared higher, peaking at 85% annually in October 2022, well above the 5% target range.
This policy derives from the so-called Erdoganomics, projected by Erdoğan who has said that high interest rates are the source of inflation. Experts say his convictions have deepened the economic crisis that has beset Turkey since 2018.
Under new leadership
Nevertheless, drastic changes are expected from the new central bank governor Hafize Gaye Erkan leading her first monetary policy meeting since national elections in May.
Deutsche Bank’s Christian Wietoska noted Erkan’s statement committing to monetary tightening, and management of macro-prudential measures.
The appointment of Mehmet Şimşek to the new cabinet following the presidential election last month was interpreted as a return to a more orthodox approach to economic and monetary policy by the economists.
“Turkey has no choice but to return to a rational basis,” Şimşek said at the handover ceremony with his predecessor on 4 June. “We will prioritise macro-financial stability.”
Another sign of a return to conventional economic policy and the potential start of a tightening campaign is the pace of depreciation in the Turkish lira since the 28 May runoff election. In less than a month the currency has depreciated by roughly 16%.
How forceful will the CBRT be?
There is an overwhelming view among economists that there will be an adjustment to monetary policy, expectations vary as to the veracity and size of the hike.
“Turkey’s monetary authority is likely to choose a gradual adjustment approach and hike its policy rate to 25% with guidance to hike more,” Bank of America Securities analysts said. “These low rates could be fortified with a rate corridor, or a signal of more hikes would be given, in our opinion.”
An alternate view, expressed by Goldman Sachs’. Waleed Mohsin predicted an increase to 40% from the current 8.5%. Whilst Societe Generale and Standard Chartered both predict rates will rise by 15% and 14%, respectively.
Yet, it is too early to declare the complete normalisation of economic policy in a country where electoral politics are highly intertwined with the economy.
Turkey will hold local elections in 9 months, a factor that some theorise, which makes it unlikely the country will incorporate large hikes as that could be unpopular among the electorates.
“We expect a 650bps hike on June 22 and two 500bps hikes in July and August. This will bring the policy rate to near the level of the average lira deposit rates, which is still far from restrictive and will result in a modest negative impact on the economy,” Oxford Economics wrote. “In our view, steeper rate hikes are unlikely because it could lead to a significant recession ahead of local elections in March 2024.”
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- CBRT expected to lift rates by more than 1000bps to 20%
- Economists divided on size of increases ahead
- First announcement under the new governor and finance minister
- Long-term normalisation is unlikely say analysts
- Decision due Thursday at 11:00 GMT
By Selin Gücüm
LiveSquawk News
@Selin_Gucum
21 June 2023 | 14:00 GMT
The Central Bank of the Republic of Turkey is widely expected to deliver its first interest rate rise in over two years on Thursday. However, economists are uncertain about how aggressive rate setters will be executing the first hike since March 2021.
An economists’ poll forecasts the central bank to hike by 1150 basis points to 20% from the current 8.5% at Thursday’s meeting.
HSBC look for a 200-bps increase adding that they expected a more conventional approach to FX policy, “with the lira being allowed to depreciate in response to increasingly unfavourable external dynamics, does not necessarily guarantee a conventional approach to interest rate policy, in our view.”
“We pencil in an additional 500bps of tightening for each of Q3 and Q4, which would take the key rate to 30% by year-end,” analysts at the bank wrote.
In what has become the ‘norm’, over the past two years the CBRT has applied unconventional monetary policy to help steer the Turkish economy. Under the approving gaze of President Recep Tayyip Erdoğan, the central has persistently lowered interest rates despite the fact inflation has soared higher, peaking at 85% annually in October 2022, well above the 5% target range.
This policy derives from the so-called Erdoganomics, projected by Erdoğan who has said that high interest rates are the source of inflation. Experts say his convictions have deepened the economic crisis that has beset Turkey since 2018.
Under new leadership
Nevertheless, drastic changes are expected from the new central bank governor Hafize Gaye Erkan leading her first monetary policy meeting since national elections in May.
Deutsche Bank’s Christian Wietoska noted Erkan’s statement committing to monetary tightening, and management of macro-prudential measures.
The appointment of Mehmet Şimşek to the new cabinet following the presidential election last month was interpreted as a return to a more orthodox approach to economic and monetary policy by the economists.
“Turkey has no choice but to return to a rational basis,” Şimşek said at the handover ceremony with his predecessor on 4 June. “We will prioritise macro-financial stability.”
Another sign of a return to conventional economic policy and the potential start of a tightening campaign is the pace of depreciation in the Turkish lira since the 28 May runoff election. In less than a month the currency has depreciated by roughly 16%.
How forceful will the CBRT be?
There is an overwhelming view among economists that there will be an adjustment to monetary policy, expectations vary as to the veracity and size of the hike.
“Turkey’s monetary authority is likely to choose a gradual adjustment approach and hike its policy rate to 25% with guidance to hike more,” Bank of America Securities analysts said. “These low rates could be fortified with a rate corridor, or a signal of more hikes would be given, in our opinion.”
An alternate view, expressed by Goldman Sachs’. Waleed Mohsin predicted an increase to 40% from the current 8.5%. Whilst Societe Generale and Standard Chartered both predict rates will rise by 15% and 14%, respectively.
Yet, it is too early to declare the complete normalisation of economic policy in a country where electoral politics are highly intertwined with the economy.
Turkey will hold local elections in 9 months, a factor that some theorise, which makes it unlikely the country will incorporate large hikes as that could be unpopular among the electorates.
“We expect a 650bps hike on June 22 and two 500bps hikes in July and August. This will bring the policy rate to near the level of the average lira deposit rates, which is still far from restrictive and will result in a modest negative impact on the economy,” Oxford Economics wrote. “In our view, steeper rate hikes are unlikely because it could lead to a significant recession ahead of local elections in March 2024.”