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Morten Lund, Analyst at Nordea Markets, suggests that they do not see a scenario where the Turkey’s key interest rate increases to much more than 20% as it may lead to financial distress and an economic slowdown.

Key Quotes

“If a rate hike of the late liquidity window to levels around 20% does not prove enough to restore confidence in the TRY, one opportunity could be to hike the official policy rate, the 1-week repo rate, or the overnight lending rate as another act of independence and credibility sign. However, this seems rather unlikely as Erdogan would want to tell the Turkish people that the official policy rate is still low and that he is in control.”

“Instead, a more likely option is to (re-)implement capital restrictions. This is, however, only a tool that would take place down the road as it might prove difficult to find political support so close to the election. Furthermore, capital controls do not spur confidence among the international investors so it would not be a preferred step. Still, this looks like the most likely scenario if CBRT is not able to defend the TRY by hiking the late liquidity window and using a more hawkish communication.”