We expect another 500bp hike (to 35%) on October 26 in view of upside risks to the CBT’s targeted disinflation path (to 33%Y) by end-2024. The CBT will likely repeat its signal for further tightening steps in rates and macroprudential instruments to steer inflation expectations and to support de-dollarisation.
We expect another 500bp hike to 35% as the CBT remains focused on inflation
We believe that the CBT will make a significant upward revision to its near-term inflation forecasts when it releases the new Inflation Report on November 2. While the CBT saw end-2023 inflation at 58%Y in July, it has pointed to the upper band of its forecast range (62%Y) following the subsequent beats in inflation. The Medium-Term Programme (MTP) published in September had the end-2023 forecast even higher at 65%Y. Given our forecast at 67.1%Y for year-end, and survey expectations at 68.0%Y, we expect the CBT to bring its year-end forecasts close to these levels, up from 58%Y previously.
Sticking to the target disinflation path requires another strong rate hike:
The last MPC statement noted upside risks to the inflation outlook, and signalled a determination to set the monetary policy stance in a way that achieves the projected disinflation path for 2024, which stood at 33%Y with an upper band of 38%Y. Supporting the credibility of this disinflation path amid substantial upside revisions to near-term forecasts requires keeping the pace of rate hikes, in our view.
Bringing the policy rate to 35%, above the intermediate inflation target which currently stands at 33%Y, would be an important step in this regard.
Moving to a positive ex ante real rate relative to expected inflation? Survey-based inflation expectations currently stand at 45.2%Y for 12 months ahead (our forecast: 46.1%Y), well above the levels implied by the CBT’s target disinflation path.
FinMin Simsek’s recent communication stated an aim to steer inflation expectations towards target levels, and to gradually move towards a positive ex ante real policy rate. Given a large gap between the policy rate at 30%, and expectations at 45%Y, another 500bp rate hike in October and a signal for more would be consistent with this communication. We factor in another 250bp hike to 37.5% in November, followed by a pause through 1Q24 before reaching a terminal rate of 40% in April.
Conditional on such a policy profile, and macroprudential measures keeping financial conditions relatively tight, we see inflation declining to 42.5%Y at end-2024.
Excerpt from the same-titled macro note
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