The Turkish Central Bank surprised everyone with a 750 basis point(7.5 percent) rate hike in their last meeting when the consensus was 250 basis points. This time the consensus expectation is at 500 basis points. I think a higher hike might be the case again. For the Turkish Central Bank, I think the biggest short-term concern is to prevent a balance of payments crisis. As the bank reserves reach new lows, protecting the value of the lira is one of the biggest priorities, and the other is ensuring capital inflow to the country. Luckily for them, both of these can be achieved by a rate hike, making the Turkish Lira relatively more attractive, and restoring confidence in the monetary system.

The rate hikes, however, are no easy decision, as the country has another election ahead, and the president does not want a fall in growth or employment until then. Given his record of sacking Central Bankers who attempted monetary tightening in the past, the Central Bank might not be able to risk breaking too hard. On the other hand, President Erdogan probably knows a balance of payments crisis will be worse for him, so he has been pro-tightening in the last few months.

As inflation peaked along with commodity prices in the last few months, and the US dollar is still being held back by the selling of CB reserves, as implied by the lowering reserves, a bigger rate hike than 5%, in my opinion, is a probability. Given the importance of foreign investment for the BIST100, even though tightening in most cases means a fall in security prices, in this case, I think it would lead to a rally. But it could be short-lived as the tightening started to concern some investors already, and the IPO boom suggests a correction sometime soon.