The Central Bank of the Republic of Turkey (CBRT) did not surprise the markets by keeping the policy rate (1-week repo) constant at 50% at the June Money Market Board (PPK) meeting. Let us remind you that when we look at the compounded level, the policy rate corresponds to 64%.
There are no surprises the MPK press release that will have a market impact. The Central Bank did its part with both interest rate increases and quantitative tightening. It has now transitioned into waiting mode to see the results of the policies implemented so far.
There are three basic messages in the MPK press release text that will not have a market impact: (i) The rise in May inflation is temporary; (ii) domestic demand is slowing, although still inflationary; (iii) no additional steps are required in quantitative tightening.
These statements are consistent with Is Invest predictions. In our main scenario, where we assume that the minimum wage is not increased, we expect domestic demand to slow down significantly starting from the summer months thanks to the delayed effects of the tight monetary policy.
With the support of the slowdown in the increase in exchange rates, a significant decline in monthly core inflation will begin in the third quarter. We estimate monthly core inflation of 3.8% in May to decelerate to 2.4% in June, and monthly headline inflation of 3.4% to 1.95%. Although the recent increase in oil prices and increases in household electricity prices will slow down the downward trend in inflation, they will not be able to break it.
The low increase in state wheat purchase prices clearly showed that Ankara gave priority to the fight against inflation. We do not expect a populist step in the opposite direction that will disrupt this cautiously optimistic picture.
After the required reserve increases of last month, the Central Bank no longer needs additional quantitative tightening. The Central Bank’s hand was relieved when the Treasury announced in June and July that it would borrow more than the debt service and signaled a less expansionary fiscal policy via Tax Package soon to be legislated.
The Central Bank will spend the summer months in standby mode, monitoring the effects of the monetary tightening on domestic demand and inflation. If the predicted decline in inflation occurs, it will make its first interest rate cut in late autumn. Before the interest rate cut, we expect that the quantitative restrictions on credit growth and the steps that force the system to “liraize” will begin to be relaxed.
By Economist Daglar Ozkan, Is Invest research note
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