As we expected, the CBRT kept its key policy rate unchanged at 17.0%, and retained its hawkish tone in the interest rate announcement. In fact, the announcement was nearly a carbon copy of January’s. The CBRT again stated that a “tight monetary policy stance will be maintained decisively, taking into account the end-2021 forecast target, for an extended period until strong indicators point to a permanent fall in inflation and price stability” and that “additional monetary tightening will be delivered if needed.”
The CBRT remains hopeful that “the decelerating impact of the strong monetary tightening on credit and domestic demand will become more significant.” Hence, in line with our expectations, the CBRT wants to see the impact of the measures already introduced on forces affecting price stability before deciding whether further action is needed. If—in line with our base-case scenario—inflation remains on the CBRT forecast path disclosed in the quarterly inflation report, we would not expect the CBRT to deliver further hikes.
The Bank is also wary of the risks on price stability such as “domestic demand conditions, cumulative cost effects, in particular the exchange rate effects, increasing international food and other commodity prices and high levels of inflation expectations”. The hawkish tone used by Governor Agbal in his recent speeches and also evident in this latest interest rate announcement note should significantly reduce the risk of premature easing.
The interest rate announcement also stated that “the balance between the monetary policy rate and actual/expected inflation will be sustained decisively to maintain a strong disinflationary effect until permanent price stability and the 5 per-cent target are reached.” This sentence was not in last month’s announcement but came directly from the inflation report released at the end of January.
This is not a very clear sentence but certainly implies that monetary easing will start only after actual and expected inflation falls in a sustained way. Currently, the CBRT offers a real policy rate of around 200bp in ex-post terms and 600bp in ex-ante terms and we expect this spread to be maintained through the year. Based on this view, we forecast a first cut in 3Q, after annual inflation starts coming down in a sustained way in line with our baseline scenario.
Finally, as reflected by the improvement in inflation expectations and ongoing portfolio inflows, prudent and orthodox policies, enhanced policy predictability, better communication with the markets have led to a significant increase in policy credibility. The hawkish tone and the absence of surprises should support this trend. We expect this process to gain momentum once we start seeing the impact of these policies on hard data, in particular on inflation and external balances.
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