This is fueled by rising energy costs, which are driving inflation, and the political crisis, which is weighing on the lira, Bloomberg reports.

Swap markets are pricing in a rate hike at the June 11 meeting. On Friday, overnight index swap (OIS) rates in lira jumped 105 basis points, implying a funding rate of around 41.75%. The central bank's benchmark rate is currently 37%, while the effective cost of average funding is at 40%.

"Swap markets have started pricing in rate hikes again, and current quotes suggest there may be no rate cut before the end of the year," notes Alp Şerbetli, head of treasury at ICBC Turkey Investment.

Global banks are also changing their forecasts: JPMorgan expects a rate hike to 40% in June, while HSBC isn't ruling out a policy tightening due to the threat of capital outflow. The reason for this was a court ruling on Thursday that annulled the results of the 2023 congress of the main opposition Republican People's Party (CHP), reinstating its previous leadership. This triggered protests, a stock collapse, and forced state-owned banks to sell billions of dollars to save the lira.

The political shock compounded the inflationary pressures from the war in Iran. Earlier in May, the Central Bank raised its year-end inflation target from 16% to 24% due to the surge in energy prices (in April, inflation was 32.4%).

Since the start of the war, the Central Bank has refrained from directly raising the base rate, but has effectively tightened policy by moving funding to the overnight rate (40%).

According to Bloomberg Economics economist Selva Bahar Baziqi, the political crisis will deplete reserves and force the regulator to act:

"We are canceling our rate cut forecasts for this year and expect a tightening of financial conditions, including a 300 basis point increase in the effective lending rate."

However, Goldman Sachs predicts that the Central Bank will keep rates at current levels until at least June, unless persistent dollarization forces it to change course.