How far do Turkish rates need to rise?

In a statement last week the governor of Turkey’s central bank, Erdem Basci, gave markets a strong steer that interest rates would be raised at tomorrow’s MPC meeting. But this is unlikely to result in a hike in the benchmark one-week repo rate. Instead, the overnight lending rate is likely to be raised – we think by 100bp to 7.5%. Changes thereafter will be determined by movements in the lira, but history suggests that a severe sell-off in the currency could see rates raised by up to 500bp in this cycle.