Market expectations for an emergency rate hike in Turkey are mounting after the monetary policy committee (MPC) on July 24 decided to keep its main policy rate constant at 17.75% despite the markets clamouring for Turkey to push up interest rates further. The decision stunned investors and there is now palpable anxiety over what Turkish policymakers are planning when it comes to combatting potential risks that could hit the already battered Turkish lira (TRY) prior to the next scheduled MPC meeting in two months’ time.

There is a lot of scepticism on the market towards the idea that with the currency under renewed pressure the central bank can really wait for the next MPC meeting on the calendar to make its next monetary move. And if government fiscal policy moves are under preparation to address the worsening economic imbalances, there is as yet no sign of them. All in all, market players are fretting that Turkey’s economic policy set under the just commenced executive presidency of President Recep Tayyip Erdogan does not yet make any real sense and that is a nagging worry given that the country’s outspoken leader regularly, and unconventionally, calls for cheaper borrowing to drive growth despite all the evidence that the Turkish economy is overheating.

The central bank decision to stick with the current one-week repo rate came as a huge shock, and left many observers convinced that Erdogan has essentially taken control of Turkish monetary policy. The lack of action from the rate-setters immediately sent the TRY into a renewed nosedive. It weakened as far as 4.9384 on July 24 against the USD following the announcement, but thereafter trimmed some losses. It was trading at 4.8635, down 0.43% d/d, as of 12:00 local time on July 25.

The Istanbul stock exchange’s benchmark BIST-100 index lost 3.33% d/d to close the day at 92,133 on July 24 while the banking shares index was down by 5.69%. The BIST-100 recovered by 1.59% to 93,598 as of 12:00 local time on July 25.

On August 3, the statistical institute (TUIK) will announce the July inflation figures. The market consensus is that Turkey’s annual inflation has at least a bit further to rise.

Turkey’s annual consumer price inflation jumped from 12.15% in May to 15.39% in June, taking the rate up to the highest level recorded since 2003, the Turkish Statistical Institute (TUIK) announced on July 3.

Capital Economics forecasts that inflation will quicken to 13.5% at end-2018 from 11.1% at end-2017.

Expectations for Turkey's end-2018 inflation rate rose from 12.28% in June to 13.88% in July, the central bank’s regular survey of businesses and analysts showed on July 18.

Another risk factor is the US Fed’s MPC meeting to be held over July 31 and August 1. A rate hike from the Fed could trigger another mass sell-off in the emerging markets universe. Trade war concerns or geopolitical tensions over Iran could also escalate at any time to create market fluctuations.

A bigger concern is that economic populist Erdogan could make more comments calling for an unorthodox loosening of monetary policy. Traders would very likely respond by dumping more lira.

An emergency MPC meeting held on May 23 was a response to lira devaluation caused by Erdogan suggesting in an interview that he would take control of monetary policy following the June 24 snap polls. After triumphing in the election, the president appointed his son-in-law as economy minister and amended central bank law through a presidential decree. Erdogan will now solely appoint the central bank governor and all other MPC members. They are appointed for the shorter term of four years.

The lira’s all-time record low of 4.97 to the dollar was seen on July 11 after Erdogan predicted a fall in interest rates.

“If ever there was any doubt that Turkish President Recep Tayyip Erdogan would live up to his electoral promise to take control of monetary policy, there is none now,” Marcus Ashworth wrote in his latest column for Bloomberg, following the July 24 MPC meeting.

“Perhaps a new low for the currency and record high bond yields might allow the central bank to belatedly argue for the needed rate hike the economy badly needs,” Ashworth added.

“The Turkish central bank’s decision to leave its one-week repo rate unchanged at 17.75%, when most had expected at least a 100bp hike, suggests that President Erdogan is already using his strengthened position [as Turkey’s first ever executive president] to influence monetary policy. The lira has sold off following the decision and another emergency rate hike now appears to be on the cards,” Jason Tuvey of Capital Economics said.

“Here we go again,” Inan Demir of Nomura Plc. told Bloomberg, commenting on the central bank’s surprising lack of action at the MPC meeting. “An emergency hike seems to be the only way out of this loop,” he added.