Morgan Stanley : Turkey's interest rate expected to hit 40% by 2024

Morgan Stanley, in its latest report on Turkey, highlighted its expectation of a further 500 basis point interest rate hike from the Central Bank of the Republic of Turkey (CBRT) in October. The bank, after meetings with government officials, bankers, local experts, and economists in Istanbul and Ankara, also predicted that the final interest rate would reach 40% in the second quarter of 2024. While acknowledging improvements in macroeconomic stability due to the new economic team and a shift towards a more traditional policy framework, Morgan Stanley issued a cautionary note, stating that challenges persist.

In their report, Morgan Stanley stated, "Our impression is that the new economic management team and their turn towards more traditional policies enjoy broad-based support. Post-election policy adjustments have been accompanied by initial results such as an ungrounded improvement in foreign reserves, significant tightening in credit spreads, and an improvement in banks' and companies' access to external financing. Alongside significant increases in TL deposit and loan interest rates and a sharp slowdown in credit growth, the reduced demand for foreign currency by local companies and moderate domestic demand have pushed Turkey toward macroeconomic stability. However, high and persistent inflation, significant external financing needs, and a complex set of non-traditional tools, including a foreign exchange-protected deposit system, pose ongoing challenges, which, in our view, necessitate further tightening measures.

Given CBRT's commitment to keeping inflation on its projected path (currently at 33% year-end for 2023) and signaling further hikes, we expect a 500 basis point increase in October, bringing the rate to 35%. Considering the preference for policies aimed at reducing high inflation and dependence on regulations, we anticipate another 250 basis point hike in November, taking the rate to 37.5%. Local elections could slow down the tightening process and indicate upward risks to the inflation outlook, but we foresee further tightening after March, with our final interest rate forecast reaching 40% in the second quarter of 2024."