Morgan Stanley Says Turkey Can Get Away With Small Rate Hike

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Turkey may need to deliver a far smaller interest-rate increase than forecast by some of the biggest global lenders, according to Morgan Stanley.

The central bank will probably raise the key one-week repo rate by just 150 basis points at its meeting on Thursday, Morgan Stanley economists Alina Slyusarchuk, Andrea Masia and Georgi Deyanov said in a report to clients.

Most forecasters surveyed by Bloomberg -- including economists at Barclays Plc, Goldman Sachs Group Inc. and UniCredit SpA -- predict an increase of 475 basis points in the benchmark to 15%.

Turkey’s central bank “might decide to deliver a larger hike to reinforce its intention to dampen inflationary pressures but we think domestic inflation drivers such as local-currency loans growth and domestic demand growth have normalized, which in itself calls for a less aggressive action,” Morgan Stanley’s economists said.

Morgan Stanley Says Turkey Can Get Away With Small Rate Hike

Installed just over a week ago by President Recep Tayyip Erdogan, Turkey’s new central bank Governor Naci Agbal faces a credibility test when he helms his first Monetary Policy Committee meeting. With Erdogan’s apparent blessing, Agbal is expected to enact a rate increase that would shore up the lira after market confidence in Turkish assets wobbled under his predecessor.

An overhaul of Turkey’s economic leadership, which also included the departure of Erdogan’s son-in-law as finance and treasury minister, saw the lira rally more than 10% against the dollar last week. The Turkish currency was little changed in early Asian trading on Monday.

Erdogan, who advocates an unorthodox theory that high rates cause rather than curb inflation, has pledged to support his new economic managers with market-friendly policies.

Morgan Stanley Says Turkey Can Get Away With Small Rate Hike

All but one analyst polled by Bloomberg predict rates will be lifted on Thursday, with the highest forecast for an increase to 16%. But in the view of Morgan Stanley, a hike of 150 basis points may be sufficient.

“We think that such a move would allow for the weighted average cost of funding to remain above current inflation while ex-ante real rates can go up to around 4%, which is half way through what was needed in 2018,” Slyusarchuk, Masia and Deyanov said.

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