Türkiye | The CBRT maintains a wait-and-see approach

The Central Bank kept the policy rate at 50% in line with expectations. We expect that annual inflation will come down to 45-50% by September on base effects before ending the year at 43%. We believe that there would be only a limited room to start easing cycle very gradually in 4Q24 considering high inflation expectations.

Key points

• Key points:
• Despite some softening, domestic demand, being still far from the expected level, has remained stronger than supply; while economic activity has slowed down more rapidly in 2Q24.
• The draft tax bill may help to contain downside pressure on the budget deficit in the near term. Nonetheless, we still believe that additional fiscal savings on the expenditure side would be more effective to get a faster rebalancing in the economy.
• Monthly consumer inflation could retreat to nearly 2.2% in June, leading its annual inflation (72.6%) to get closer to the median of the forecast range of the CBRT, which shows an easing in inflation trend and confirms the MPC statement of a temporary pause in May inflation trend.
• Upside risks on inflation outlook are still alive on strong inflation inertia, high inflation expectations and geopolitical risks. Inflation expectations remain far from the CBRT targets with 43.5% for 2024 end and 25.5% for 2025 end (vs. 38% and 14% targets of the CBRT respectively).
• The CBRT might continue to accumulate reserves with current account surplus during the summer, de-dollarization of residents and supportive capital inflows. In the respect, since the CBRT swaps with the local banks are almost finished, the CBRT will carefully watch the liquidity in the system and act accordingly if it’s needed with additional sterilization tools.

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