Türkiye | The CBRT remains cautious on inflation outlook

The Central Bank kept the policy rate at 50% in line with expectations, maintaining a wait and see approach with a hawkish message. They highlight a potential temporary increase in monthly inflation in July, but expect the rise in the underlying inflation trend to be limited.

Key points

• Key points:
• The Central Bank (CBRT) repeated its commitment to support monetary transmission mechanism via additional macro-prudential measures if needed. Last Friday, the CBRT had reduced the monthly credit growth cap to 1.5% (from 2%) in foreign currency lending. After today’s decision, it is said that the CBRT might also hold FC and gold swap auctions to sterilize TL liquidity.
• On inflation, they highlight a potential temporary increase in monthly inflation in July due to adjustments in administered prices and taxes as well as supply-side factors in unprocessed food prices. However, they expect the rise in the underlying inflation trend to be relatively limited.
• They repeat their assessment on domestic demand as slowing down but still remaining at inflationary levels. Considering the lagged effects of the monetary tightening, they maintain a wait and see approach with their hawkish message on a potential tightening in case a significant and persistent deterioration in inflation is foreseen.
• We forecast inflation trend to keep improving after July’s temporary effects and finish the year with 43% annual inflation. Since unanchored medium term inflation expectations maintain upside risk on inflation outlook, we keep an upward bias on our short term policy rate expectations which include limited rate cuts in 4Q24.

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