Turkish Central Bank’s Monetary Policy Committee left the policy rate, the one-week repo auction interest rate, unchanged at 50 percent. The Bank had also kept the policy rate unchanged at its previous meeting. The bank hinted further measures could be introduced to sterilize excess liquidity from the system so that the central bank policy rate remains effective.
Economists had anticipated that the Central Bank of the Republic of Turkey (CBRT) would leave the interest rate decision unchanged. However, there was speculation that the central bank might modify the wording of the rate decision note to pave the way for rate cuts starting in September, pointing at emerging political pressures.
With the change in CBRT management in the summer of 2023, the new team is one to be taken seriously. Therefore, before the rate cut cycle begins, the Monetary Policy Committee (MPC) needs to signal its intentions in its rate decision text.
Currently, the text states that:
– Inflation is still driven by domestic demand, even though domestic demand has now cooled.
– There are still upside risks to the inflation path compared to the target.
– The concept of “additional tightening” is still mentioned if needed.
If the CBRT is to start rate cuts in November with a 250 basis points reduction this year, we need to see changes to these three views in its upcoming August and September MPC meetings. These changes should be based on monthly CPI inflation figures aligning with its end-of-year estimation of 38% for 2024 and 14% for 2025. In other words, we should see monthly CPI inflation figures below 2%, which seems challenging under the current dynamics.
In a statement released by the Central Bank of the Republic of Turkey (CBRT), it was noted that inflation is expected to increase temporarily in July due to administered price changes, while the rise in the underlying trend will remain limited.
The CBRT reaffirmed its commitment to maintaining a tight policy stance and reiterated that “In case of a significant and permanent deterioration in inflation, the monetary policy stance will be tightened.”
The Central Bank had raised the interest rate to 50 percent due to the “deterioration in the inflation outlook” before the local elections on March 31, despite expectations that it would be kept constant. CBRT maintained the interest rate at 50 percent in April, May, and June.
The statement from CBRT included the following: “The Monetary Policy Committee (the Committee) decided to keep the policy rate, the one-week repo auction interest rate, unchanged at 50 percent. In June, the underlying trend of monthly inflation recorded a significant weakening. Leading indicators suggest that monthly inflation will rise temporarily in July due to administered price and tax adjustments, which are relatively outside the monetary policy’s sphere of influence, and supply-side developments in unprocessed food prices. Nevertheless, the rise in the underlying trend is expected to remain relatively limited. Recent indicators confirm that domestic demand continues to slow down, albeit still at inflationary levels. The high course and rigidity in services inflation, inflation expectations, geopolitical risks, and food prices keep inflationary pressures alive. The Committee closely monitors the alignment of inflation expectations and pricing behavior with projections.”