Atilla Yesilada:  Will Central Bank of Turkey dare hike rates?

I consider the CBRT MPC to be held on Thursday as one of the most important milestones in the adventure of the Economic Stabilization Program (ESP). It’s not my basic scenario, but if the CBRT increases interest rates, the stock market will boom and Turkey will turn into a hot money paradise in a few months.

Although elections are just around the corner, global investment banks have begun predicting  rate hikes as early as this Thursday. According to Goldman Sachs analysis cited by Bloomberg last week, MPC is preparing to hike 200 basis points.

In a news article published in Bloomberg on Sunday, Mehmet Şimşek’s following statements attracted attention:

“According to Şimşek, who leads economic policy team in Turkey, the CBRT has the independence to take the necessary measures to slow down inflation.

The economy czar said, “The Central Bank has a free hand, so to speak.”

Minister of Finance Mehmet Şimşek spoke  in an interview broadcast on Channel 7 on Sunday. “CBRT will do whatever it takes to reduce inflation,” he stated.

Şimşek said that the president supports the new program. “The new program includes the “normalization” of monetary policy. The previous policy was not ‘functional’”[1], he concluded. Şimşek may have given the message of an interest rate increase.

It is certain that Şimşek has paved the way to higher interest rates, but I am not sure if it will happen before the election. I give a maximum of 30% probability that the CBRT will do additional monetary tightening of 200-500 basis points this Thursday. However, my expectation for a single or cumulative interest rate increase of the said magnitude in April and May is 66% and 100%, respectively. In my dream world, monetary tightening does not end with 500 basis points, the CBRT increases the policy rate to 60% and keeps it there for at least a year.

If the most important reason for the CBRT to refrain from increasing interest rates this month is Erdogan’s veto, the second reason is the governors’ view that the cumulative effects of the monetary tightening since the Inflation Report presentation will be sufficient to reduce the 2024 CPI to the year-end target. In a sense, monetary tightening without seeing additional data on inflation could lead to a loss of credibility. The only reason for the CBRT to change its previous view of “this is enough” may be the slightly upward movement in inflation projections in the March Expectations Survey.

My basic scenario for the upcoming MPC is the addition of the phrase “if inflation expectations deteriorate, additional monetary tightening will be made” to the text and a long paragraph explaining that the quantitative measures taken in the last 2 weeks will be sufficient to keep inflation on the central path.

Although the CBRT may sincerely think so, the measures taken  thus far have stopped  neither demand for foreign exchange demand, nor reigned in credit growth, which is critical to achieving the inflation target.


CBRT also increased credit card interest rates last week. However, this measure may not be sufficient, either. Some depositors and companies may be bringing forward their spending, sensing that loan interest rates will increase rapidly after the election.

In previous data weeks, foreign exchange demand may have been driven by banks increasing correspondent balances abroad, firms increasing their foreign exchange accounts, and Russian deposit accounts being closed. However, in the last data week, we saw that the locals were flocking to FX deposits to the tune of $3.5 bn, one of the reasons for which could  be the proliferation  of post-election devaluation scenarios and rumors  Şimşek’s dismissal videos on YouTube.

Although doubts that Erdoğan  will keep Simsek in office after the election will be eliminated, the demand for foreign currency from residents will continue even in the summer months when tourism income will turn the current account balance  positive. There is a very simple reason for this. “Perceived inflation” is far beyond official figures. Food prices and rents we obtain from independent sources are going crazy. In fact, according to the CBRT’s inflation path forecast, the CPI, which is currently 66%, will peak around 73-75% towards the summer. In other words, the perceived TL real interest rate is almost as negative as the day Şimşek took over.


So, what happens if the CBRT increases interest rates in line with my low-probability scenario? If a decision was made to increase interest rates by even 100 basis points, the view of ESP by both individual depositors with high savings and fund managers investing in Emerging Markets would change radically. At that point, it would be unreasonable to question Erdoğan’s loyalty to orthodox policies and whether Şimşek will remain in office. The fact that Erdoğan, who still cannot guarantee victory in 3 major cities, allowed the interest rate increase even before the election means that the political obstacles to the success of ESP will be completely removed after the election.



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[1] Btw, this is my translation of the  Turkish account of Bloomberg news item.

Published By: Atilla Yeşilada

GlobalSource Partners’ Turkey Country Analyst Atilla Yesilada is the country’s leading political analyst and commentator. He is known throughout the finance and political science world for his thorough and outspoken coverage of Turkey’s political and financial developments. In addition to his extensive writing schedule, he is often called upon to provide his political expertise on major radio and television channels. Based in Istanbul, Atilla is co-founder of the information platform Istanbul Analytics and is one of GlobalSource’s local partners in Turkey. In addition to his consulting work and speaking engagements throughout the US, Europe and the Middle East, he writes regular columns for Turkey’s leading financial websites VATAN and and has contributed to the financial daily Referans and the liberal daily Radikal.