Investors are upping the pressure on Turkey to restart its monetary tightening cycle.

Calls for more interest rate hikes grew after Turkey released its February inflation data on March 4, showing the official headline rate moving up to a 15-month high of 67% from January’s 65%.

The policy rate, meanwhile, is at 45%, following hikes amounting to 3,650 bp brought in since June last year.

Turkish Treasury and Finance Minister Mehmet Simsek said on March 4 that the country’s rate-setters believe that monetary policy is tight enough as things stand, but also noted that authorities plan additional credit tightening and quantitative tightening steps.

In the week prior to the inflation release, Daron Acemoglu, a prominent Turkish-born professor and economist at the Massachusetts Institute of Technology (MIT), told Reuters in an interview that Turkey had not tightened policy enough to achieve its disinflation goal because real interest rates remained negative despite the dramatic policy U-turn that brought about the series of rate hikes seen from June to January.

Acemoglu said he was "not super optimistic about the Turkish economy" and described the Turkish central bank's inflation forecasts as "unrealistic".

The central bank’s stated expectation is that annual inflation will rise through mid-year to above 70% before dropping to 36% by year-end. bne IntelliNews has questioned whether the authority is stating an ambitious target, rather than something it sees as a viable reality. The central bank has said it will tighten the benchmark more if inflation moves above its forecasts.

Looking at whether the Turkish economic team appointed after last May’s national elections could revive foreign capital inflows into Turkey, Acemoglu said: "I think you have to be insane to think that the Turkish macro economy has normalised and the Turkish structural problems have been solved at the moment and, you know, go in there with a big foreign direct investment for example."

The extent of government control over markets discourages both domestic and foreign companies from investing in Turkey, especially in new technologies, he added, observing: “Turkish exports of technology, equipment and knowledge is similar to levels in 2006 and 2007. So there has not been any type of upgrading of technology that you would expect from a middle income country."

In January, some top emerging market debt asset managers were sending out the message that foreign investors would steer clear of Turkish lira (TRY) bonds until inflation reverses course and decelerates, meaning foreign inflows likely would not materialise until at least mid-year at best.

Bloomberg reported on March 5 that swap traders were now pricing a 300-bp policy rate hike in April, following the bigger-than-expected 67% rise in consumer prices in February. 

On March 4, JPMorgan said it expected the central bank, which has kept the key rate on hold since January, to raise the rate by 500 bp to 50% in April and revise its inflation forecast upward. Goldman Sachs agreed that further tightening was possible.

Morgan Stanley analysts removed two rate cuts they previously anticipated for November and December, saying they now saw the first cuts as only occurring in 1Q25. 

Bloomberg also reported that the offshore 12-month forward implied yield—an indicator of offshore lira funding costs—jumped to 60% on March 5, the highest level seen since Simsek’s appointment last May and a signal that tighter liquidity conditions are expected ahead.