Deutsche Bank, in its published report on the Turkish economy, shared the prediction that a more moderate and orthodox monetary policy mix could be adopted following the new cabinet and appointments to critical institutions. The note stated, “The rapid depreciation of the Turkish lira requires an immediate significant interest rate hike.”
Referring to Mehmet Şimşek’s appointment as the Minister of Treasury and Finance, the bank’s economists stated, “Şimşek is open to orthodox economic policies, and his appointment was positively received by the markets. Additionally, the appointment of Hafize Gaye Erkan as the head of the Central Bank of the Republic of Turkey (TCMB), with her past experience in the financial sector, has increased expectations of a shift towards a more orthodox policy.”
Economists noted that inflation would continue to be the biggest challenge in the economy. They shared the prediction that headline inflation would approach around 50% by the end of the year, considering factors such as the imbalance between supply and demand caused by the earthquake, the impact of minimum wage increases, and the recent depreciation of the Turkish lira.
Economists reminded that the TCMB kept its policy rate unchanged at 8.5% in the latest meeting and emphasized that the new executives would implement a more orthodox and aggressive front-loaded monetary policy due to inflationary pressures, record-low real interest rates, and low reserves.
“Aggressive but not excessive”
The report stated that the bank’s approach would be aggressive but not excessive, and regarding interest rates, it mentioned, “At this point, it is difficult to make a definitive assessment, but the rapid depreciation of the Turkish lira requires a significant interest rate hike initially. On the other hand, the government needs to strike a balance to avoid causing a collapse in credit growth.”
The policy rate could be increased to 25% in the first instance or there could be consecutive interest rate hikes in June and July. In the second scenario, interest rates could first rise to around 18-20% and then to 25% in July. Whether this increase would be the last remains uncertain and will depend on the movement of the Turkish lira and portfolio flows. The possibility of interest rates surpassing 30% is not ruled out.
Provided by Bloomberg HT