Goldman Sachs predicts potential rate hike to 40% in Turkey

Goldman Sachs, a renowned Wall Street bank, said that the appointment of Mehmet Simsek as the new Turkish finance minister and Hafize Gaye Erkan as the central bank governor indicated a growing consensus within the new administration that both monetary and fiscal adjustments were necessary.

In a statement released on Friday, Goldman Sachs announced significant revisions to its forecasts for Turkey. The bank emphasized that stabilizing the economy would require a substantial and potentially abrupt adjustment to the exchange rate.

While there is still a lack of clarity regarding the monetary policy framework at this stage, Goldman Sachs noted that a "fully orthodox policy-maker" would allow the exchange rate to adjust upfront and would raise the repo rate to a level that effectively anchors interest rates in the economy.

Clemens Grafe, a representative from Goldman Sachs, stated in a note to clients, "In our view, this suggests that an orthodox policy-maker would raise rates to 40%, which is the current level of deposit rates." Grafe further added that once the exchange rate and inflation expectations stabilized, there could be a swift reduction in rates, possibly reaching 25% by the end of the year.

However, allegations have emerged suggesting that Mehmet Simsek, the new finance minister, is already facing challenges in managing the economy. According to an article by Erdal Saglam, a Turkish business journalist for 10 Haber, the appointment of former Central Bank Governor Sahap Kavcioglu as the head of the Banking Regulation and Supervision Agency (BDDK) by the President Tayyip Erdogan came as an unexpected development in the markets.

Saglam claimed that Simsek was demoralized over the appointment, a move that could indicate that Kavcıoglu would exert control over Simsek, acting as a 'shadow minister.'