Turkey: Markets Expect Interest Rate Hike
Turkish financial markets are increasingly anticipating a significant interest rate hike by the central bank, as recent political developments have heightened uncertainty in the country.
On May 22, the U.S. bank JPMorgan stated that it expects the Turkish Central Bank to raise its key interest rate by 300 basis points to 40% at its next meeting on June 11. An earlier rate hike is also not ruled out.
The British bank HSBC was more cautious, stating that an interest rate hike is particularly likely if pressure on the Turkish lira continues to mount. At the same time, implied interest rates for lira swaps were approaching the 43% mark.
The current key interest rate (one-week repo rate) stands at 37%, while active refinancing via the overnight facility is at 40%. A 300-basis-point hike would raise the effective funding rate to 43%.
Political tensions are weighing on confidence
The trigger for the recent market uncertainty was a decision by the 36th Civil Chamber of the Ankara Regional Court on May 21. The court stripped Özgür Özel of the leadership of the largest opposition party, the CHP, and reinstated his predecessor, Kemal Kılıçdaroğlu.
Despite the explosive nature of the decision, the political situation remained relatively calm at first. Both Özel and Kılıçdaroğlu avoided an escalation. Observers believe that the government is aiming for a split within the CHP rather than the direct removal of the party leadership.
Since October 2024, the CHP has come under increasing pressure from investigations and judicial measures. Istanbul Mayor and opposition presidential candidate Ekrem İmamoğlu has been in custody since March 2025. The number of imprisoned CHP mayors has recently risen to 24.
Many political observers view the measures as an attempt to prevent İmamoğlu from running in the upcoming presidential election. Recent polls had identified him as a serious challenger to President Recep Tayyip Erdoğan.
Central Bank Defends the Lira
The political turmoil has once again led to speculation about interventions in the foreign exchange market. According to Bloomberg, state-owned banks reportedly sold foreign currency worth around $6 billion on the day of the court ruling 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 deployed substantial sums in the spring to prop up the national currency. According to estimates, around $50 billion was used in March to defend the lira. By early May, approximately $18 billion of the previously deployed reserves had been replenished.
Markets Show Initial Recovery
Despite political uncertainty, the Turkish lira has recently stabilized against the US dollar. Thanks to government interventions, the USD/TRY exchange rate remained largely unchanged at around 45 lira per dollar.
The stock market also reacted positively. The benchmark BIST 100 index rose by 5% on May 22, after plunging by 6% the previous day.
While the risk premiums on Turkish government bonds, as measured by five-year credit default swaps (CDS), rose slightly, they remained below the 250-basis-point mark. This suggests that financial markets currently still view the situation as manageable.
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 largely determine whether market stabilization continues or whether new turbulence looms.
