In a rather surprising move, the CBRT cut its 1-week repo rate 100bp to 18.00%. Given the strength in economic activity and in price pressures, a vast majority of market players (including ourselves) were expecting the CBRT to remain on hold. It is also interesting to see the CBRT venturing a rate cut when most other central banks in the world, in either EM or DM, are either delivering or preparing to deliver tighter policies. We fear that the decision could strengthen demand-led price pressures, cause fresh cost-led pressures through a weaker lira and create stronger inflation inertia through higher inflation expectations. Furthermore, an early start of the easing cycle suggests that bringing down inflation in a rapid way is not a policy priority. As a result, we have made significant upside revisions to our inflation forecasts. We have revised up the end-2021 forecast to 16.7% from 15.5% and revised up the end-2022 forecast more sharply to 14.5% from 11.5%. Depending on how fast and furious the easing cycle will be, there could be upside risks to these forecasts.
The interest rate statement provided no clear policy guidance, so it is not easy to conclude if this was a single rate cut or the first step of a series of cuts. Interestingly, despite the rate cut, the interest rate announcement note was not that much different from the previous notes. The CBRT still referred to the recovery in global and domestic economic activity and to the strong inflationary pressures. Regarding the rationale behind the rate cut decision, the CBRT stated that the recent rise in inflation was due to “transitory” supply-side factors and that the tightness in monetary stance has started to have a higher than envisaged contractionary effect on commercial loans (which are incidentally up 9%oya when adjusted for FX moves!).
Importantly, the main policy guidance sentence emphasizing the commitment to maintain tight policies until inflation falls significantly is omitted this month. Instead, the note stated that “it is judged that a revision in monetary policy stance is needed and the policy rate was decided to be reduced”. This change suggests that the CBRT sees it fit for an easier policy stance and hence this was likely the first of a series of cuts. In our view, if the CBRT was courageous enough to cut rates while annual inflation was on the rise, it could easily deliver more when annual inflation falls due to strong base effects in the coming months. Although today’s surprise has clearly shown the difficulty of making forecasts based on fundamentals, we still think it would be difficult for the CBRT to deliver another cut when annual inflation approaches 20% in October. We see a cumulative 100bp in cuts only in the last two months of the year, bringing the policy rate down to 17% at year-end. We see the cyclical trough of the policy rate at 15% in May. However, the risks are for a sharper easing and a higher inflation.
Source: JP Morgan