Foreign investors and Turkiye watchers are keeping a close eye on the steps the new economic team will take in the period ahead.
There are expectations that portfolio inflows in to the country may increase depending on the messages sent out by those at the helm of the economy management.
The key event will be the Central Bank’s Monetary Policy Committee’s rate-setting meeting next week, said the analysts, noting that the restoring confidence is important for the return of foreign investors to the Turkish markets.
Foreign analysts expect the Central Bank to hike its policy rate – one-week repo auction rate – from 8.5 percent to 20 percent at the MPC meeting on July 22.
The appointments of new names to the economy management after the elections aims at convincing markets regarding change in policies, said Elliot Hentov, head of macro policy research at State Street Global Advisors.
“Markets expect a substantial interest rate hike. If this happens, foreign investors may start to return to Turkiye,” he said.
Hentov noted that the Turkish Lira has lost 20 percent of its value since the elections.
In the period ahead, reducing imports may not be enough to bring the current account deficit under control, further deprecation of the lira may become necessary, he said.
The appointments of Mehmet Şimşek as the Treasury and Finance Minister and Hafize Gaye Erkan as the Central Bank governor signal that rule-based policies will be pursued, according to Ehsan Khoman, head of emerging markets research at MUFG Bank.
Their base scenario is that the Central Bank will increase the policy rate from 8.5 percent to 20 percent, Khoman said.
At its latest meeting on May 25, the Central Bank decided to keep the policy rate unchanged at 8.5 percent.
Erdoğan’s support for Şimşek
Meanwhile, President Recep Tayyip Erdoğan has voiced support for the newly appointed Şimşek.
“Of course, we agreed [for Şimşek] to take the steps he will take quickly and easily, together with the Central Bank,” Erdoğan told reporters on June 14 on his way back to Turkiye from a visit to Azerbaijan.
Erdoğan, however, added that people should not assume that he had made a “serious change” in views regarding interest rates.
The president has long argued that high interest rates cause high inflation.
“I have the same opinion there,” he told reporters.
Erdoğan also reiterated the government’s determination to bring down inflation to single digits.
The inflation was 6.2 percent, while the interest rate was 4.6 percent when he was the prime minister, he recalled.
“At that time, we worked with the theory of ‘low interest rate-low inflation.’ I am still working with the same theory and am of the same opinion,” Erdoğan said.