Morgan Stanley CBT Preview: Keeping Pace

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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Published By: Atilla Yeşilada

GlobalSource Partners’ Turkey Country Analyst Atilla Yesilada is the country’s leading political analyst and commentator. He is known throughout the finance and political science world for his thorough and outspoken coverage of Turkey’s political and financial developments. In addition to his extensive writing schedule, he is often called upon to provide his political expertise on major radio and television channels. Based in Istanbul, Atilla is co-founder of the information platform Istanbul Analytics and is one of GlobalSource’s local partners in Turkey. In addition to his consulting work and speaking engagements throughout the US, Europe and the Middle East, he writes regular columns for Turkey’s leading financial websites VATAN and and has contributed to the financial daily Referans and the liberal daily Radikal.