International banks offer varied forecasts for Turkish Central Bank interest rate

International banks offer varied forecasts for Turkish Central Bank interest rate
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HSBC projects a 250-basis-point increase, while Deutsche Bank and Morgan Stanley anticipate more substantial hikes of 500 basis points each in the highly anticipated October 26 announcement

The Turkish Central Bank (TCMB) is set to reveal its policy interest rate decision on Thursday, leaving both local and foreign investors eager to see which way the scale will tip. Foreign banks have been busy lining up their interest rate forecasts ahead of the announcement.

In this highly anticipated decision, scheduled for October 26, HSBC has projected a 250-basis-point interest rate hike, while Morgan Stanley and Deutsche Bank are bracing for more substantial increases of 500 basis points each.

TCMB's previous meeting saw a significant interest rate hike of 500 basis points, raising the rate from 25% to 30%. This marked a cumulative increase of 2,150 basis points over the past four meetings, a sign of the Central Bank's determination to tackle inflation.

Foreign banks' preferences for TCMB's interest rates are as follows:

Economists at Deutsche Bank, Yiğit Onay and Christian Wietoska, have updated their outlook on TCMB's policy stance, expecting a 500-basis-point hike in the October meeting and 250-basis-point increases in both November and December. They attributed these forecasts to growing geopolitical risks and their potential impacts on Turkey's inflation and balance of payments dynamics. The economists suggest that once the interest rate reaches 40%, the hiking cycle will conclude, a level they expect to be reached by the year's end.

Morgan Stanley anticipates a 500-basis-point rate increase on October 26, followed by a 250-basis-point hike on November 23. The bank foresees the TCMB putting the brakes on future increases after these moves. They predict the next interest rate hike to be in April 25, 2024, with an increase of 250 basis points, eventually reaching the 40% threshold. Morgan Stanley also speculates that "Depending on the policy profile and macroprudential measures, we expect inflation to decline to 42.5% on an annual basis by the end of 2024" in an environment where financial market conditions remain relatively tight.

International bank HSBC, based in the United Kingdom, has shared its interest rate forecasts for Turkey. In a note signed by bank economist Melis Metiner, HSBC predicts that TCMB will raise its policy rate by 250 basis points to 32.5% on October 26, and they do not expect further interest rate increases in the final quarter of the year. The note also points out that policymakers in Turkey are using TCMB's 33% year-end inflation projection as the basis for their real interest rate calculations.

Investors will be closely watching the TCMB's decision, as it not only impacts Turkey's economic outlook but also serves as a litmus test for the country's commitment to stabilizing its inflation rate in the face of mounting global challenges.