The Turkish central bank’s monetary policy committee (MPC) on August 27 announced a policy rate hike of a far larger than expected 750bp, taking the benchmark to 25% (chart).

The market expectation was for 250bp. Following the rate hike, the USD/TRY rate fell into the 25s from the 27s, while Turkey’s five-year credit default swaps (CDS) dropped to below the 400 level.

In June, following the appointment of Turkey’s post-election new economic team, the MPC launched the ongoing tightening process, taking the policy rate to 15% from 8.50% with a 650bp hike. In July, it delivered 250bp. Both moves undershot market hopes and predictions. The latest move is significantly more to the global finance industry’s taste.

The next MPC meeting is scheduled for September 21. Currently, whether the authority will slow down the tightening is unknown. The question is whether it will have authorisation from Turkey’s president, Recep Tayyip Erdogan, to move forward to a 30% benchmark.

Recent indicators point to a continued increase in the underlying trend of inflation, the MPC said in its statement accompanying the rate increase. It added that the main drivers were the strong course of domestic demand, cost pressures stemming from wages and exchange rates, the stickiness of services inflation and tax regulations were the main drivers.

In addition to these factors, with the rise in oil prices another driver, higher-than-anticipated deteriorations in inflation expectations and pricing behaviour imply year-end inflation that will be close to the upper limit of the forecast range provided in the central bank’s inflation report.

In July, the central bank hiked its forecast for end-2023 official inflation to 58% from the 22% given in the May inflation report. Also, the upper boundary was moved up to 62% from 27%.

Moreover, the central bank said it anticipated that official inflation would peak at just below the 70%-level in May 2024.

On November 2, the central bank will release its next inflation report and updated inflation forecasts.

Monetary tightening will be further strengthened as much as required in a timely and gradual manner until a significant improvement in the inflation outlook is achieved, the MPC also noted on August 24.

The committee said it would also continue to simplify and improve the existing micro- and macroprudential frameworks in a gradual manner.

In this context, recent regulations targeting an increase in the share of Turkish lira deposits among all deposits will strengthen the monetary transmission mechanism, according to the committee.

In addition to the increase in the policy rate, the committee will continue to take decisions on quantitative tightening and selective credit tightening to support the monetary policy stance.

From the finance industry’s perspective, the central bank delivered the desired rate hike. The market demand will now be for a continuation in the delivery of sharper steps.

However, as ever with Turkish economic policy, analysis will show that we now have a case of “spot the contradiction”.

On the one hand, the MPC says it will “continue to simplify and improve the existing micro- and macroprudential framework”. But that statement is followed by talk of “in this context, recent regulations targeting” and a commitment “to continue to make decisions on quantitative tightening and selective credit tightening”.

Whatever the real details of the way forward, the Erdogan regime will deliver a positive real return. Contradictions or other puzzling details will not prove to be too important. The finance industry remains on the sidelines, awaiting the policy rate peak.