By Jonathan Spicer and Marc Jones
LONDON, April 3 (Reuters) - Turkey's central bank chief and finance minister have told investors they are confident in the steps taken to address the fallout from the Iran war, according to three meeting participants, who were left with the impression that an interest rate hike was an option.
At the meetings in London on Wednesday and Thursday, dozens of foreign investors met Central Bank Governor Fatih Karahan and Finance Minister Mehmet Simsek at a time when soaring
global energy prices are testing Turkey and other economies.
In response, Turkey's central bank has halted its easing cycle at 37%, lifted its overnight rate by about 300 basis points to near 40%, and sold and swapped tens of billions of dollars in forex and gold reserves to support the lira currency.
HIKE SEEN POSSIBLE AT APRIL 22 POLICY MEETING
In London, investors repeatedly asked Karahan and Simsek what more they were willing to do, including potentially hiking the main interest rate at an April 22 policy meeting, if the U.S.-Israeli war with Iran continues and keeps pressure on foreign-exchange rates, participants told Reuters.
The investors said they sounded calm and determined to maintain the currency policy mix, while keeping the door open to a rate hike - especially if energy prices remain elevated - though they gave no signal it was certain.
One participant said they came away believing the central bank's "base case" was to hike rates on April 22 unless there was a de-escalation in the war before then. A significant war escalation could prompt an earlier move, the investor said, requesting anonymity.
Another fund manager said they read the responses slightly differently.
"They didn't rule out rate hikes, but they certainly didn't seem in a hurry to do anything," the participant said, adding that the key message expressed was that, "they are not going to allow the currency to weaken".
The third participant said the policymakers played down some concerns of a potentially bigger shock from the war by referencing measures already taken, and did not close the door to a potential rate hike.
The central bank did not respond to a request for comment. A slide presentation that Simsek made to investors, published on Wednesday, said short-term war effects were negative but manageable.
SALES AND SWAPS SLASH RESERVES
Money market pricing underlines expectations that the central bank will raise its main rate by about 300 basis points to 40% this month - a policy change that Bank of America predicted in a client note on Wednesday.
A tightening would mark the second time the central bank reversed an easing cycle that began in late 2024, after it temporarily hiked rates a year ago due to a domestic political market shock.
Disinflation has slowed in recent months in energy import-heavy Turkey and the energy price shock has lifted inflation expectations. Annual inflation was 30.9% in March, data showed Friday.
The central bank's sales and swaps have slashed total reserves by about $55 billion in a month, and reduced gold reserves by nearly 120 tons in two weeks.
The bank wants a stable forex rate to avoid import inflation. Karahan has defended the gold-related measures and said it will maintain the needed tight policy to keep disinflation on track.
Foreign investors have dumped some $6 billion in Turkish debt in four weeks, bringing their share down to 7% from 10% of the total, according to data and bankers' calculations.
In London, the first participant said investors were concerned rather than panicked and expected Karahan and Simsek "to do the right thing".
(Reporting by Jonathan Spicer in Istanbul and Marc Jones in London; Additional reporting by Nevzat Devranoglu; Editing by Alison Williams)
