Turkey continues to tighten

The further hike in Turkish interest rates today merely underlines how vulnerable the economy is to the recent slowdown in capital inflows. Looking ahead, much will depend on how the current EM sell-off pans out and whether the lira comes under further pressure. For now, we think there could be further, albeit modest, hikes in the O/N lending rate over the rest of the year. But a sharp fall in the lira could be met by much more aggressive tightening.