We expect the CBRT to raise the one-week repo rate by 200 bps to 19.5% on 24 August. The CBRT has hiked rates by 900 bps in the last two months and used various policy and prudential measures to underscore its commitment to the ongoing shift towards orthodox policy. This marks a departure from the policy mix prior to Türkiye’s May elections. We expect this approach to continue amid resurgent price pressures, Turkish Lira (TRY) weakness, and rising external and fiscal imbalances.

External balances could deteriorate further near-term, providing little respite for the TRY. We expect a return to monthly C/A deficits for the rest of 2023 amid rising fuel prices, still-robust domestic demand, and a seasonal slowdown in tourism-related FX inflows in Q4. A sustainable improvement in the C/A balance will require a moderation in domestic demand, which should eventually result from the recent policy pivot towards economic stabilisation.

We expect the central bank to proceed cautiously with rate hikes, based on recent monetary policy decisions and CBRT communications. We forecast the weekly repo rate at 24.0% by end-2023. A continuation of recent coordinated monetary, fiscal, and macro-prudential measures to rein in domestic demand and address market distortions could lead to some initial improvements as early as H1-2024.