While Morgan Stanley expected an increase of 11.5 points in the first meeting in the new economy model under the management of Mehmet Şimşek, and another 5 points in the next meeting, it also shared its dollar rate forecast.
Morgan Stanley explained its expectations in its Türkiye analysis:
With Mehmet Şimşek’s appointment as Finance Minister and his initial statements, we believe that more traditional policies are expected, including faster currency depreciation and higher policy rates. We expect interest rates to reach 20% in June and 25% in August. Uncertainty remains very high as further policy direction can be expected.
The new Finance Minister is signaling a change in policy orientation: the appointment of Mehmet Şimşek as Finance Minister is an important sign, as we mentioned earlier, signaling a return to more traditional monetary policy. In his first public statements, Şimşek stated that “Turkey has no chance of returning to a rational ground”. In the discourse, where transparency, predictability and compliance with international norms are emphasized as the basic principles, Turkey will prioritize macrofinancial stability and establish fiscal discipline and implement structural reforms to ensure price stability, according to the Minister of Finance. Cevdet Yılmaz, who was appointed as the Deputy Minister of Finance and known to have traditional views, emphasized that they would prioritize the fight against inflation.
Is a faster depreciation process expected?
We expected the post-election correction to include a weaker currency and tighter financial conditions, but there is uncertainty regarding the rate of TL depreciation and interest rate hikes. First, we interpreted yesterday’s sharp currency movement, the 7.3% rise in USD/TRY, as a policy choice that wants to allow a faster TL depreciation. However, it is reported that state banks have resumed foreign exchange sales as of June 8 to support the TL (Annex 1). In fact, CBT’s net FX position improvement of $3 billion overall from June 2-6 was reversed with a decline of $2.5 billion on June 7, indicating indirect foreign exchange sales (Annex 2). This suggests that we may see smaller movements instead of the big ones like yesterday (USD/TRY is expected to be around 28 at the end of the year according to our strategists) until the officials carry out their plans regarding monetary policy and other economic program elements.
CBT has exercised strong control over the foreign exchange market, with banking sector regulations limiting local people’s demand for foreign currency and an effective reserve management strategy (borrowing from regional partners, buying foreign currency through export delivery terms and foreign currency hedging deposits (KKM), and selling foreign currency through state banks). . We believe that the authorities have the means to carry out a controlled front-loading currency correction, but with it substantial rate hikes and a credible program to follow. This will support external stabilization and bring about a faster recovery in inflows and reserves, but will initially cost higher inflation due to exchange rate pass-through. Hence, the pace of currency correction remains an important policy choice in the days before the June MPC meeting.
It looks like we’re seeing rate hikes for the first time in more than two years: With the appointment of Şimşek and the expected changes in the central bank management, we expect a normalization in the current 8.50% policy rate. However, we think that a partial adjustment to the policy rate is more likely, given President Erdogan’s known preference for low interest rates.
We do not expect the policy rate to reach levels that indicate positive real interest rates: There is a large gap between the policy rate and the inflation rate (general consumer price index 39.6% per year and core inflation 46.6% per annum). Based on CBT’s survey, inflation expectations are set at 29.8% for the next 12 months and 17.7% for the next 24 months. We think that policy makers would prefer a phased approach to normalize the policy rate towards expected inflation to manage financial stability risks associated with banks’ and firms’ balance sheets. Therefore, we expect that the authorities will continue to use alternative tools (MAC with macroprudential measures and liquidity measures, but to a lesser extent) to control financial conditions and foreign exchange demand.
We expect the policy rate to be raised from 8.50% to 20.00% at the MPC meeting scheduled for June 22, but there are large uncertainties in the interest rate profile because we expect further policy direction: While this is a massive 11.50 percentage point increase, we still see deep negative real policy rates. contains. We should also take into account that current deposit and loan pricing are both around 35%. However, this would send a strong signal of policy normalization after a period in which a clear preference for low interest rates dominated monetary policy. We think the policy rate could rise to 25.00% in Q3 (August) and policymakers are determined to stay at these levels until the government approaches its targets (with a future medium-term program or to be announced earlier). Current OIS pricing shows a policy rate expectation of around 17% for the next meeting and around 30% for the end of the year.
Uncertainty about the future of rates is very high: potential appointments to CBT management (governor and MPC members) and communication by the new team could result in changes in our interest profile before the June 22 meeting. We need further guidance from policymakers to understand how much conventional monetary policy tightening will stand against tightening through alternative instruments. We’ll also be watching how quickly new management will roll back requirements for holding long-term fixed-rate government bonds that are subject to interest rate risk. Building credibility will likely take time given Turkey’s past relatively short-lived turnarounds in interest rate policy, but this orientation should eliminate risk scenarios of relying on more uncommon measures (including tighter foreign exchange regulation) to maintain extremely low interest rates.
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