The strongly positive initial reaction given by markets to April 18’s surprise announcement of snap elections in Turkey gave way to a more tempered response on April 19 as analysts debated whether a rate hike or rate cut is more likely next week.

UniCredit put out a note saying the Turkish central bank was likely readying a sizable interest-rate increase, if its actions in the past were a good indication of what it will do come April 25, the date of the next meeting of its monetary policy commitee (MPC).

Its London-based strategist Kiran Kowshik wrote that whenever the Turkish lira’s (TRY) implied volatility starts trading at a premium to that of its emerging-market peers, the central bank moves ahead with a strong policy response. That spread widened last week to 1.40 volatility points, a level that has triggered action from the monetary authority in the past, Bloomberg said.

Under strain from Turkey’s worsening mix of economic ills—sticky double-digit inflation, a yawning current account deficit, signs that some of the country’s biggest conglomerates are struggling to pay their debts and that Turkish banks may face mounting problems with problem loans, and the fear that an overheating economy, based on debt-fulled growth that is outstripping that of China, is not being addressed with the required monetary policy response given pressure from the politicians—the TRY rapidly weakened to its all-time low of 4.1944 to the dollar on April 11.

However, following the news that Turkey will go to the polls for parliamentary and presidential elections on June 24, rather than in November next year, the TRY made its biggest one-day advance since January 2017. It closed at 4.0074 on April 18 and at around 19:00 Istanbul time on April 19 stood at 4.0310.

UniCredit said it is staying bearish on the lira over the medium term, but has now taken profit on a short recommendation and “moved to the sidelines” before the monetary-policy decision. The market was presently pricing in an April 25 rate increase of between 75 and 100 basis points (bps), but if the central bank was to raise borrowing costs by 125 bps, the market could see a rally in the lira, it added.

William Jackson at Capital Economics was more circumspect. Concluding that the gains in Turkish assets seen on the election announcement appeared to reflect market hopes that the polls would reduce political uncertainty, he added in an April 18 note to clients: “However, we think there are reasons for caution. For one thing, there is a risk that policy is loosened ahead of the vote in order to shore up support for the [ruling] AK Party.”

Previously, on April 11, Jackson pencilled in a 100bp hike he predicted would be introduced in the central bank’s late liquidity lending rate at its next MPC meeting.

Looking at overall market sentiment towards the planned elections, which will be held under Turkey’s extended now 22-month-old state of emergency, brought in after the attempted coup, Jan Dehn, head of research at Ashmore Group in London, was quoted by Bloomberg as saying: "The rule of thumb for Turkey is that political stability is more important than anything else. If [President Recep Tayyip] Erdogan wins another term then stability—better the devil you know—is assured for the foreseeable future."

The BIST-100 benchmark index of the Istanbul stock exchange gained 3.08% to 112,099 on April 18, having been flat until the afternoon election announcement. At the close on April 19, the index was preliminarily recorded at 112,122, 0.02% up day on day.

Meanwhile, longer-dated Turkish sovereign dollar bonds extended gains on April 19. Some issues posted one-month highs. The January 2041 issue moved up 0.3 cents to 93.96 cents in the dollar, the highest since mid-March, Tradeweb data showed. The February 2045 bond also hit a near one-month high. It gained 0.13 cents to 99.29 cents.

April 19 also saw Turkish five-year credit default swaps (CDS) recorded at 195 bps, a near two-week low. The previous trading session produced an intraday high of 204 bps, IHS Markit data showed.