Goldman Sachs expects Turkey rates to hit 40%

Reuters/Andrew Kelly

Goldman Sachs said on Friday the appointments of Mehmet Simsek as Turkish finance minister and Hafize Gaye Erkan as central bank governor suggested a widespread understanding in the new administration that monetary and fiscal adjustments were needed.

The Wall Street bank, in an overhaul to a number of its forecasts for Turkey, said stabilising the economy “will require a large, and we think discontinuous, adjustment to the exchange rate.”

While guidance was for the monetary policy framework was still missing at this stage, the bank noted, a “fully orthodox policy-maker” would allow the exchange rate to adjust upfront and would raise the repo rate to a level where it anchored interest rates in the economy.

“In our view, this suggests that an orthodox policy-maker would raise rates to 40 percent, the current level of deposit rates,” Clemens Grafe said in a note to clients.

Grafe added that once the exchange rate and inflation expectations stabilised, rates could be lowered quickly, possibly to 25 percent by end-year.

Goldman Sachs also cut Turkey’s GDP forecast to 2.3 percent year-on-year in 2023, from previously 2.9 percent.

Earlier this month JPMorgan economists said an interest rate hike to 25 percent from the current 8.5 percent is on the cards for Turkey’s monetary policy committee’s upcoming meeting on June 22, “if not earlier”.

“A policy rate hike to 25 percent, from the current level of 8.5 percent, is on the table for June 22 or earlier, along with forward guidance suggesting smaller rate hikes if needed,” the Wall Street bank said in an economic research note to clients.