The change of Turkey’s central bank governor and stickier inflation opened room for more interest-rate hikes, which the bank under former Governor Hafize Gaye Erkan had indicated were ending in January, according to Deutsche Bank AG. PA Turkey agrees with this view, forecasting not one, but several rate hikes in the aftermath of local elections. Additionally, monetary policy will have to remain tight through 2025, possibly meaning no rate cuts, to have any prospect of reducing sticks inflation to single digits by 2026.
Morgan Stanley is more reserved: “Unlike past governor changes in 2019 and 2021, this does not signal a change in policy direction, or a political preference for lower interest rates. We expect the CBT to continue with a conventional monetary policy framework that prioritizes disinflation. We will have a chance to listen to his policy messages during the CBT’s Inflation Report presser that is scheduled for this coming Thursday”.
JP Morgan economists added that “While sudden leadership changes bring discomfort for investors, we see the new CBRT Governor as positive for disinflation and lira. We think that the reshaped MPC is likely more hawkish. The stance of two MPC members – Dr. Elif Haykir Hobikoglu and Dr. Fatma Ozkul- is not known but the Governor and two hawkish deputy governors will likely drive MPC decisions with increased focus on disinflation, in our view.
It is now likely that the dovish tilt in its last MPC statement will be reversed. We expect that CBRT Governor Fatih Karahan will deliver hawkish forward guidance in CBRT`s Inflation Report Press Briefing next Thursday, if not earlier.
We expect high rates for longer along with tighter macroprudential measures as monetary policy is likely to be more sensitive to the inflation outlook going forward. We now see a rate hike by the CBRT as more likely than a rate cut.
However, we don’t yet believe that a rate hike will actually be delivered and keep the peak policy rate at 45% – recognizing upside risks to it”.
According to Kerim Karakaya of Bloomberg, “Even in case of no additional hikes, the strategists said they see no cuts this year due to underlying price pressures and expect the market to price in a more gradual easing cycle for 2025”.
Deutsche researchers predicted: “Given our view of stickier inflation pressure in the near-term in combination with the appointment of the new governor, we see room for another 250 basis points or even 500 basis point of front-loaded tightening. The latter is not yet priced in”.
As of Friday, the swap market was pricing almost no change in interest rates until May.
Commentary
The views by investment banks are shaped not by fundamentals, but by modeling Erdogan’s policy choices. It is widely believed with great justification that Erdogan will not want Central Bank policy rate to rise much beyond the current 45%.
PA Turkey disagrees with this view, though our forecasts are predicated on AKP-MHP sweeping end-March local elections. It will take positive ex-post real rates to convince locals to switch from FX to TL, while to attract financial investment from long-term funds (in contrast to those who come in for just the carry trade gains), Turkey must offer reasonably high reel bond yields ex-ante.
The ex-ante is a big question of course, since beyond a monthly survey conducted by Central Bank among a limited number of participants, there is no good forecasts of future inflation. In the past, the participants in the a.m. survey have erred on the dovish side severely underestimating inflation in 12-24 month horizons.
It is quite possible that trend CPI had become sticky around 45-50% per annum, while domestic demand growth is still too buoyant to offer any comfort vis—a-vis lower inflation. Moreover, long lasting austerity programs tire the citizenry and the political class, meaning that ex-ante real rates must go way beyond 50% to achieve the goal of sustainable disinflation.
Mehmet Simsek must somehow convince his boss, Erdogan, to give him more freedom to adjust policy rates. Is that even feasible? PA Turkey believes it is, IF Erdogan and nationalist ally win local elections, effectively ending any hopes of the opposition clinging to power now and in the future.