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Turkey's Economy: New Administration Might Boost Interest Rates to 40%

Goldman Sachs suggests the latest changes in Turkey's government might signal an impending interest rate hike to 40%.

Mehmet Şimşek, Republic of Türkiye Minister of Treasury and Finance
Mehmet Şimşek, Republic of Türkiye Minister of Treasury and Finance

Predicted Shift Towards Orthodox Monetary Policies

On Friday, Goldman Sachs indicated that the recent appointments of Mehmet Simsek as Turkish finance minister and Hafize Gaye Erkan as central bank governor hint at an understanding within the new administration of the necessity of fiscal and monetary adjustments. These new appointments could imply a change in economic direction, leaning towards a more orthodox policy approach.

Exchange Rate Adjustments for Economic Stability

The Wall Street powerhouse has updated several of its forecasts for Turkey, emphasizing that stabilizing the country's economy would necessitate a considerable and discontinuous adjustment to the exchange rate. As Goldman Sachs points out, guidance for the monetary policy framework is currently lacking, but an orthodox policymaker could step in to stabilize the situation.

Possible Surge in Interest Rates

Such a "fully orthodox" policy-maker might permit an upfront adjustment of the exchange rate and elevate the repo rate to a point where it could effectively anchor the economy's interest rates. Goldman Sachs analyst Clemens Grafe notes that this scenario might lead to interest rates soaring as high as 40%, which matches current deposit rates.

Interest Rates Could Drop Post Stabilization

Grafe further suggests that after stabilizing the exchange rate and inflation expectations, the interest rates could be swiftly reduced, potentially reaching 25% by the end of the year.

Goldman Sachs Cuts Turkey's GDP Forecast

Additionally, Goldman Sachs has downgraded Turkey's GDP forecast 2023 to 2.3% year-on-year, a significant drop from the previously projected 2.9%.