Turkey: Markets expect interest rate hike

The Turkish financial markets are increasingly anticipating a significant interest rate hike by the central bank after recent political developments have increased uncertainty in the country. The US bank JPMorgan stated on May 22 that it expects the key interest rate to be raised by 300 basis points to 40% at the next interest rate meeting of the Turkish central bank on June 11. An early interest rate hike is also not ruled out. The British HSBC was more cautious and stated that an interest rate hike is particularly likely if the pressure on the Turkish lira continues to increase. At the same time, the implicit interest rates for lira swaps approached the 43% mark. The current key interest rate (one-week repo rate) is 37%, while active refinancing via the overnight facility is at 40%. An increase of 300 basis points would raise the effective financing rate to 43%. Political tensions weigh on confidence The latest market uncertainty was triggered by a decision by the 36th Civil Chamber of the Ankara Regional Court on May 21. The court stripped Özgür Özel of the chairmanship of the largest opposition party CHP and reinstated his predecessor Kemal Kılıçdaroğlu. Despite the explosive nature of the decision, the political situation initially remained relatively calm. Both Özel and Kılıçdaroğlu avoided an escalation. Observers assume that the government is aiming to split the CHP rather than directly eliminate the party leadership. Since October 2024, the CHP has come under increasing pressure from investigations and judicial measures. The Istanbul mayor and opposition presidential candidate, Ekrem İmamoğlu, has been in custody since March 2025. The number of imprisoned CHP mayors recently rose to 24. Many political observers see the measures as an attempt to prevent İmamoğlu's possible candidacy in the upcoming presidential elections. Polls had recently classified him as a serious challenger to President Recep Tayyip Erdoğan. Central bank defends the lira The political turmoil once again led to speculation about interventions on the foreign exchange market. According to Bloomberg, state banks are said to have sold around USD 6 billion worth of foreign currency on the day of the court ruling in order to stabilize the Turkish lira. The Turkish government does not publish official figures. Market observers estimate the volume of interventions based on the central bank's balance sheet data. The central bank had already used considerable sums to support the national currency in the spring. According to estimates, around 50 billion US dollars were used to defend the lira in March. By the beginning of May, around 18 billion US dollars of the previously used reserves had been built up again. Markets show first signs of recovery Despite the political uncertainty, the Turkish lira has recently stabilized against the US dollar. The USD/TRY exchange rate remained largely unchanged at around 45 lira per dollar thanks to government intervention. The stock market also reacted positively. The leading index BIST 100 rose by 5% on May 22 after falling by 6% the previous day. The risk premiums on Turkish government bonds, as measured by five-year credit default swaps (CDS), rose slightly but remained below the 250 basis point mark. This indicates that the financial markets still consider the situation to be manageable at present. In the coming weeks, investors are likely to focus primarily on the central bank's foreign exchange reserves and the next interest rate meeting. Monetary policy decisions will play a key role in determining whether the stabilization of the markets continues or new turbulence threatens. The post Turkey: Markets expect interest rate hike appeared first on ostwirtschaft.de.