We see a 100bp cut to 15.00% by the CBT this week, although a larger 150bp move should not be excluded. We also expect forward guidance to be unchanged, keeping the door open for further easing. On the strategy side, we remain bearish on TRY and expect the currency to continue to weaken.
The CBT is likely to tolerate a weaker currency to continue easing
We expect the CBT to cut the key rate to 15.00% at the MPC meeting on November 18. We expect unchanged forward guidance, suggesting the possibility of further easing, as we currently pencil in a further 50bp cuts in December and January to 14.00%. We think two aspects of recent CBT communication indicate continuation of easing steps despite ongoing pressures on FX and inflation.
First, the CBT is likely to find more room for easing based on measures of inflation excluding supply-side factors which it deems temporary. One such measure is the underlying trend of core inflation (B and C in 3M SAAR terms) which recently posted a decline. Second, the CBT’s recent shift of focus to current account improvement as a factor contributing to price stability and financial stability implies increased tolerance for a weaker currency. Accordingly, we think that the CBT will be more confident in its dovish stance based on the continued improvement in the current account indicated by the latest data that showed the year-to-date deficit US$16.6 billion lower compared to same period last year.
Conditional on our rate profile, we expect inflation to remain high through 2022 due to continued lira weakness and a deterioration in inflation expectations adding to the cost pressures coming from higher energy and producer prices.
We forecast CPI inflation at 19.5%Y by year-end, climbing to 21%Y in 1H22 before falling down to 18%Y at end-2022. This implies ex post real rates reaching -5% in December and remaining deeply negative through 2022, increasing the sensitivity to global financial conditions and geopolitical developments.
We think that the CBT’s forward guidance on “limited room” for a downward adjustment until the end of the year does not rule out the possibility of a 150bp cut in November. Given mounting pressure on the currency and its pending impact on inflation, the CBT might choose to use any room for manoeuvre in a front-loaded manner at Thursday’s meeting.
Macro strategy: The trend is your friend
We remain bearish on the currency as the CBT should continue to ease policy at a time when the Fed has begun tapering and data from the US remain strong. The latest inflation print from the US kept market bets on the hawkish side, which supported USD and was negative for EM FX. We updated our USD/TRY forecast with the 2022 Global Strategy Outlook and expect the lira to continue to track the upper range of the historical trend, which puts it at 11.50 by end-2022. Risks are skewed towards more weakening as we continue to expect a strong USD while the CBT is easing policy and the current account should be back in a deficit.
Excerpt from Turkey Economics and Macro Strategy | Europe
Easing Despite CPI Pressures
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