Türkiye | The CBRT remains cautious but eases its tone

The Central Bank kept the policy rate unchanged at 50%. The bank smoothed its tone by changing the statement that monetary policy will be tightened when necessary to that monetary policy tools will be used effectively. Still, they emphasize inflation expectations and pricing behaviors as risks to the disinflation.

Key points

• Key points:
• Restrictive monetary policy and the tight financial conditions lead output gap to turn into negative in 3Q and the domestic demand to moderate further, especially driven by private consumption. So, inflationary pressures from domestic demand diminish, also acknowledged by CBRT.
• Despite the deceleration in domestic demand, the recent Central Bank’s Market Participants Survey revealed that inflation expectations have slightly improved but continued to remain above the upper bound of the Central Bank’s inflation forecasts (42% for 2024 and 25% for 2025).
• In its statement, the CBRT focuses on the risks posed by high inflation and pricing behaviors, with no emphasis on the possible ease in external financing conditions after the 50 bps rate cut decision from the FED on Wednesday. Hence, the statement signals that the CBRT would remain cautious in the near future.
• The inflation trend will remain stable in September, though it could begin to decline starting from October on the back of the diminishing impact of recent price adjustments, potentially bringing the monthly inflation trend down to slightly below 2% in the last quarter of the year. However, the magnitude of administrative price and tax rate adjustments, along with wage hikes at the start of 2025, could pose risks to the inflation trend.
• We expect consumer inflation to decrease to 43% by the end of 2024 which could create room for the CBRT to consider to start a gradual easing cycle. However, high inflation expectations and uncertainties stemming from wage and price adjustments at the beginning of 2025 require a cautious stance. Therefore, we have shifted our first rate cut expectation from November to December, with a 250 bps cut while anticipating credit growth caps especially on consumer loans to continue for a while.

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