CBRT Inflation Report  bolsters rate cut expectations

CBRT made sizeable upward revisions to its inflation forecasts. The CBRT’s revised 3-year CPI inflation interval projections are as below

▪ End-2024: revised to 44% (42-46%) from 38% (34-42%)

▪ End-2025: revised to 21% (16-26%) from 14% (7-21), and

▪ End 2026: revised to 12% (6-18%) from 9%.

CBRT Governor reveals that the underlying inflation trend has remained higher than their projections. The revised estimates are also higher than the recent Medium-Term-Program (MTP) projections of 41.5%, 17.5%, and 9.7%. In fact, these revisions do not come as a surprise to us, as the 10-month cumulative inflation has already reached 40%, so meeting the MTP target for 2024 was out of reach. In our October inflation review report, we had already shared our expectation of a revision to 43.0-43.5% levels.

CBRT Governor Fatih Karahan clarified that the underlying inflation trend has remained higher than their expectations, which was the main culprit behind the revisions, along with higher food prices (which is beyond the CBRT’s control as specified by Karahan.

Despite these upward revisions, CBRT Governor Fatih Karahan struck a notably dovish tone, bolstering expectations for a near-term rate cut.

 

Karahan emphasized that the substantial revisions would not affect the Bank’s policy course, attributing the recent inflation forecast miss largely to external factors beyond the monetary policy control, such as surging rental and food inflation. Additionally, he noted that, excluding rental pressures, services inflation has seen significant moderation—a view with which we are somewhat cautious. In our assessment, these dovish messages seem aimed at preparing markets for an upcoming rate-cut cycle, a prospect that has indeed strengthened rate-cut expectations, as evidenced by the stock market’s rebound.

 

The CBRT may be considering a total rate cut of around 750-1000 basis points by April.

Governor Karahan disclosed that the Bank expects CPI inflation to ease to 38% by March, reflecting a three-month delay in achieving the previously projected end-2024 inflation target. Karahan suggested this delay should not pose significant issues for the disinflation process, which is another dovish signal, in our view. Despite these dovish messages, the CBRT remains also committed to sustaining a tight monetary policy stance.

To uphold the policy tightness, we believe the policy rate should target an ex-post real rate of approximately 300-500 basis points, at least in the initial stages of the rate cut cycle. Given the CBRT’s forecast of 38% CPI inflation by March, we sense that the Bank may be positioning itself for a rate-cut cycle totaling around 750-1000 basis points by April. Nonetheless, it remains uncertain whether inflation will align with the CBRT’s projections.

 

Serkan Gonencler, Chief Economist, Gedik Invest

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Published By: Atilla Yeşilada

GlobalSource Partners’ Turkey Country Analyst Atilla Yesilada is the country’s leading political analyst and commentator. He is known throughout the finance and political science world for his thorough and outspoken coverage of Turkey’s political and financial developments. In addition to his extensive writing schedule, he is often called upon to provide his political expertise on major radio and television channels. Based in Istanbul, Atilla is co-founder of the information platform Istanbul Analytics and is one of GlobalSource’s local partners in Turkey. In addition to his consulting work and speaking engagements throughout the US, Europe and the Middle East, he writes regular columns for Turkey’s leading financial websites VATAN and www.paraanaliz.com and has contributed to the financial daily Referans and the liberal daily Radikal.