Deutsche Bank Sees Another Turkey Hike Under New Governor’s Helm

(Bloomberg) -- The change of Turkey’s central bank governor and stickier inflation opened room for more interest-rate hikes, which the bank under former Governor Hafize Gaye Erkan had indicated were ending in January, according to Deutsche Bank AG. 

“Given our view of stickier inflation pressure in the near-term in combination with the appointment of the new governor, we see room for another 250 basis points or even 500 basis point of front-loaded tightening. The latter is not yet priced in,” strategists including Christian Wietoska wrote in note. As of Friday, the swap market was pricing almost no change in interest rates until May.

Even in case of no additional hikes, the strategists said they see no cuts this year due to underlying price pressures and expect the market to price in a more gradual easing cycle for 2025.

In his first written statement after the appointment, new Governor Fatih Karahan said that price stability was “the priority” for the central bank. Bloomberg also reported that interest-rate cuts could be expected to be postponed until at least the end of this year under Karahan’s leadership. 

The central bank under Erkan raised the benchmark policy rate to 45% from 8.5% over eight months. Last month, the bank said it was ending the tightening cycle but maintaining its hawkish bias.

The Turkish lira has lost about 30% of its value against the dollar since Erkan and Treasury and Finance Minister Mehmet Simsek came to office in June, partly as a result of their decision to roll back a costly intervention policy that had drained central bank reserves, deterred foreign investment, and that had also failed to prevent its depreciation. The currency fell on Friday after Erkan said she was resigning, dropping 0.5% to 30.4887, its lowest-ever close.

“Additionally, the central bank may employ additional macro-prudential measures to counter declining lira deposit rates and to restore the healthy functioning of the monetary policy transmission mechanism,” the Deutsche Bank strategists wrote.

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