According to analysts at ABN AMRO, Erdogan is trying to improve the overall positions of Turkish households by stimulating economic growth and as a result, raising interest rates did not fit with the government’s growth strategy.

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“Yet, as we already predicted, sharply rising inflation may put a halt to this strategy. With inflation trending towards 18% and thereby considerably eroding household incomes, we feel Erdogan may reconsider his strategy and perhaps choose to fight inflation after all (or will try to find a middle-way between curbing inflation and stimulating growth).”

“This view is reaffirmed by the statement of the central bank on Monday 3 September that the monetary stance will be adjusted at the 13 September MPC meeting in light of the inflation data.”

“We however do not foresee a ‘Argentina scenario’ of an aggressive hike and we think that the government opts to only hike rates in line with inflation (around 200bp on 13 September). Thereby they will continue to disappoint investors, who feel the central bank should take the drop of the lira into consideration by setting interest rates.”

“If there is further pressure on the lira, we anticipate that the CBRT will not increase interest rates but only set the funding requirements to the late liquidity window, which would effectively mean a further rate hike (300bp above the benchmark one-week repo rate).”

“They may also take other measures to limit FX swap transactions, for example by capping currency swap transactions in which banks can engage as a percentage of shareholder equity.”

“All in all, we think that rising rates in line with inflation, reintroduction of the corridor system and more actions by the CBRT to discourage short-selling won’t be enough to curb the fall of the lira, in part because of the one-off nature of some of these policy instruments.”