Overnight interest rate expectations are rising

As the Central Bank delays a widely-expected decision to lift its interest rates, markets are anticipating that the bank will deliver a shaper rate hike. Last week, market participants who were discussing whether a 1.5 point hike would be enough are now talking about a 2-2.5 point rise at least. 

The markets had expected a rate hike decision from the economy summit last week. When those expectations did not materialize, foreign exchange rates increased. People are wondering what direction the United States dollar/Turkish lira exchange rate will take this week, which surpassed 4.31 over the weekend.

By looking at what has happened so far, some market participants have commented that “the Central Bank has failed to convince the government about a rate hike.” One banker said the meetings planned with financial circles in the United Kingdom validate such views, adding that “I believe they [politicians] are of the opinion that holding talks with finance circles will help to stop the increase in interest and exchange rates.” According to the banker, such a thing would not happen, thus arguing that the markets would experience some volatility this week.

The messages sent out in London and answers to be given to the questions asked there are crucial, said the same banker, adding that if government officials repeat the messages they have given at home, then the exchange rates will move upwards. If the Central Bank refuses to lift the rates until the Monetary Policy Committee meeting in June, it will face much higher exchange rates, the banker said.

Almost all market participants think it is only possible to stop the depreciation of the lira through interest rate hikes and other measures would not work. They hope officials realize this immediately.

Why are they worried now? 

Apparently, the comments made by those in power regarding interest and exchange rates in the post-election period really scare the markets. I have received an interesting response from a banker whom I asked “in the past you would say, ‘this is the rhetoric of politicians, but eventually they will do what is necessary.’ What has changed now?” In the past, there were people who would achieve what was necessary, despite all the rhetoric, but now as Deputy Prime Minister Mehmet Şimşek has weakened, they are less optimistic and that is why they are afraid of the rhetoric, said the banker.

The same banker added that they believe the Central Bank’s management is aware of the problem but since the bank fails to act, worries are mounting. I need to note the expectations that if the current party remains in power, people with different economic views would be put in charge and such expectations create a certain perception of risk for the future.

“If the rates are not hikes, people who do not currently consider buying the United States dollar will start to buy the green back,” said the market participants, suggesting that the lira will depreciate further.

What happens if the central bank delivers a rate hike that is seen satisfactory by the markets?

Bankers, who are in close contact with foreigners, have said some foreign investors are waiting for the rate hike and they may buy stocks that are cheap in terms of the U.S. dollars.

They have also said a number of foreigners, who think the Turkish economy has structural problems, do not plan to invest in Turkey under the current conditions, even if interest rates are hiked.

In summary, markets see interest rate hikes as a must. Exchange rates will probably move much higher if interest rates are not increased. It looks like the interest rate hike will only save the day until the election and the outlook is not very bright for afterward.