Wall Street's major banks virtually uniformly predict that interest rates will rise to levels higher than those seen following the 2018 currency decline after the Turkish elections.

Citigroup Inc. analysts now predict Turkey's key rate to conclude the following quarter at 40%. Bank of America Corp. expects the benchmark to peak at 50% before falling slightly in the final three months of the year.

Turkish President Recep Tayyip Erdogan is facing the biggest challenge to his 20-year rule due to economic issues and the high cost of living, not to mention that victims of the earthquake are reconsidering where their loyalties lie after the disaster struck.

The market appears to agree, with derivatives used to speculate on future borrowing costs also indicating forecasts for considerably higher rates following the referendum.

Bloomberg experts' consensus on third-quarter projections has risen from 10% in February to 25.5%, compared to the current 8.5%.

According to Citi economists Ilker Domac and Gultekin Isiklar,  “A stronger adjustment bringing the policy rate to about 40% or even higher may be a more prudent course of action."

The large dose of monetary tightening projected by global banks indicates that economics will triumph over politics, regardless of the outcome of President Recep Tayyip Erdogan's two-decade tenure.

If elected, an opposition coalition has vowed a return to traditional monetary policy and an "autonomous" central bank.

Erdogan currently has the authority to directly select and remove the central bank governor and members of the monetary policy committee.

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If Erdogan's unorthodox methods are called into question, the journey back to the mainstream will almost certainly be longer and more expensive than if the central bank had intervened sooner in the face of one of the world's worst inflation crises last year, according to Bloomberg.

Unsustainable policy

Turkey has fallen short of correcting its large current-account deficit or suffocating pricing pressures by relying on ad hoc measures while keeping official borrowing prices substantially below inflation.

Viktor Szabo, an investment director at abrdn in London believes the current policy path is "unsustainable."

“And while the opposition has a sensible macro program, it will be a painful adjustment as it would require crashing the economy first to bring down inflation,” Szabo added.

Sections of the economy are already operating substantially independently of government policies. Deposit rates have reached their highest level in four years, with the difference between them and the central bank's benchmark being the biggest in a decade.

Erdogan has committed to his "New Economic Model," a program that favors exports and low-interest loans, eschewing traditional policies in favor of ultra-low interest rates.

Despite inflation exceeding 85% in 2022, the central bank has not hiked its main rate in two years. Instead, it has cut the benchmark in half since mid-2021, bringing it down to single digits.

Read more: Faith in Erdogan and his economic policies dwindles

Although an opposition victory would signify a more significant rupture with Erdogan's legacy, there are indicators that policy gears might move even if the incumbent AK Party retained power.

Erdogan said last week that his market-friendly former finance minister, Mehmet Simsek, is overseeing an economic policy revamp without taking on a formal position.

BofA economists including Zumrut Imamoglu believe that “Regardless of the outcome, we see a weaker lira and tightening economic conditions to address imbalances."