Morgan  Stanley: Turkey rate cuts knocking   on the door

A softer tone and  implicit real rates  guidance signal that the CBT is getting ready to start gradual rate cuts in line with a decline in realised and expected inflation. We bring forward our expectation for the first cut to December from January, but still see a tight monetary stance prevailing.

Unchanged rates but a shift in  forward guidance:

 

The CBT kept its policy rate unchanged (at 50%) for an eighth  month as widely expected. The MPC adopted a  softer tone on the inflation outlook compared to last month, while it shifted to  implicit guidance on real rates, in our view,   by adding this new sentence: “…the level of the policy rate will be determined in a way to ensure the tightness required by the projected disinflation path, taking into account both realised and expected inflation”. This echoes the governor’s remarks during the last Inflation Report press conference where he said that maintaining the current level of the policy rate implies an effectively tighter monetary policy stance as inflation and inflation expectations  decline.

While  opening the door for gradual rate cuts to start soon, the CBT intends to keep the monetary stance tight in view of the projected disinflation  path,  and “remains highly attentive to inflation risks”.

A softer tone, pointing to an improvement in inflation and inflation expectations

The MPC noted a decline in the underlying trend of inflation in October, a continued slowdown in domestic demand (reaching disinflationary levels) and signs of improvement in services inflation.  Moreover, the previous mention of  increased uncertainty regarding the pace of improvement in inflation  was removed from the statement. On the side of caution, the MPC mentioned elevated levels of unprocessed food inflation due to temporary supply conditions, and risks regarding inflation expectations and pricing behaviour.

Another notable change was the newly added sentence that factors in increased coordination with fiscal policy as contributing significantly to disinflation. Accordingly,  we think that the  CBT’s base case scenario assumes  new year wage and price hikes to be compatible with its disinflation path. We think that a minimum wage hike of around 30% and energy price hikes of around 25% are compatible with the CBT’s near-term inflation trajectory and an end-2025 forecast of 26%Y (see Turkey: About to Turn a Corner,  November 18, 2024).

We now expect the first rate cut in December, from January previously…

Our reading of the statement is that the CBT intends to deliver a measured cut in December barring any significant upside surprises in November inflation,  publicly set wages and prices, and  FX volatility in the meantime (until the meeting on December 26). In view of the MPC’s new forward guidance, and the balance of risks, we now expect rate cuts to start in December, from January previously. We see headline inflation  declining to 46.5%Y (1.9%M) in November and 44.5%Y (1.5%M) in December, providing room for a   200bp rate cut in December that would keep the ex post real rate in positive territory.

We expect the CBT to keep a 100-200bp pace until the policy rate reaches 28.5% in December 2025 conditional on inflation declining towards our 26%Y end-2025 forecast. Our forecasts continue to imply a gradual decline in ex post real rates from an average of around 5% in 1H25 to sub 3% in 4Q25 as headline inflation comes below 30%Y as we have in our 2025 outlook.

…but uncertainty around appropriate tightness remains:

Given uncertainty around what level of ex post or ex ante real rate would be sufficiently tight to ensure disinflation towards the CBT’s forecast range (21-26%Y for end-2025), rate cuts could be paused sooner or the CBT could continue with smaller steps as and when the decline in inflation stalls.

 

Excerpt  from “CBT Review: Setting the Stage”

 

Follow our  English language YouTube videos  @ REAL TURKEY:   https://www.youtube.com/channel/UCKpFJB4GFiNkhmpVZQ_d9Rg

And content at Twitter: @AtillaEng

Facebook:  Real Turkey Channel:   https://www.facebook.com/realturkeychannel/

 

 

 

 

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.