Shifting tides in Turkiye’s economy: Analysts grapple with implications of potential rate hike

Economists at major global banks are divided on their predictions regarding Turkiye’s approach to raising interest rates this month, reports Bloomberg. The unexpected re-election of President Recep Tayyip Erdogan has brought the prospect of a rate hike to the forefront, a stance previously dismissed by market observers.

Erdogan, known for his aversion to high borrowing costs, is reshuffling his economic team as Turkish assets face strain due to an inflation crisis exacerbated by his preference for ultra-low interest rates.

Prominent financial institutions like JPMorgan Chase & Co. and Barclays Plc now project a potential rate hike of 16.5 percentage points during the upcoming policy meeting, while Societe Generale SA anticipates a more modest increase, according to Bloomberg. If realized, these moves would represent some of the largest interest rate adjustments made by the Turkish central bank since 2010. Beyond this month, international banks offer contrasting visions of the future path of monetary tightening.

Societe Generale’s Marek Drimal predicts two consecutive five-percentage-point hikes following a 6.5 percent move on June 22. This will bring the benchmark rate to 25 percent by August, from its current 8.5 percent. In contrast, Barclays’ Ercan Erguzel suggests the possibility of the central bank reaching a key rate of 35 percent by October. JPMorgan maintains its end-of-year forecast of 30 percent, a view initially proposed months before the May elections.

“The first rate hike might be intended to close the gap between the policy rate and the average deposit rate,” Fatih Akcelik, JPMorgan’s Turkey economist, tells Bloomberg. The weighted average interest rate for deposits up to three months has skyrocketed to an unprecedented level of nearly 34 percent. These soaring rates reflect the urgent need for the central bank to address the divergence between policy rates and market rates.

Cabinet Reshuffling and Market Sentiments

Although President Erdogan has not publicly commented on interest rates since the election, he is actively revamping his cabinet. He has appointed Mehmet Simsek, a former Merrill Lynch strategist, as the new treasury and finance minister. Moreover, the potential consideration of Hafize Gaye Erkan, a finance professional with experience at Goldman Sachs Group Inc. and First Republic Bank, as the central bank’s governor, indicates a potential shift towards more orthodox economic policies.

Governor Sahap Kavcioglu, currently leading Turkiye’s central bank, shares Erdogan’s belief that low-interest rates can effectively combat inflation. However, market expectations and the views expressed by economists align with the possibility of Turkey returning to a more conventional approach. Derivatives used to speculate on future borrowing costs now reflect an estimated increase of approximately 15 percent within a month.

It is worth noting that the Turkish central bank has refrained from raising rates for over two years and did not hint at any policy changes during its most recent meeting in May.