Morgan Stanley:  What’s Next After February  Inflation?

The CBT will likely wait for March inflation before deciding on further hikes

We think that the current macro backdrop of strong domestic demand, elevated  inflation momentum and renewed pressure on FX reserves calls for further rate  hikes to anchor expectations towards official forecasts. But given its communication  since January, we think that the MPC would want to see the March inflation print  before deciding on further rate. This would be in line with the latest MPC statement which read  that the “monetary policy stance will be tightened in the event that a significant and  persistent deterioration in inflation outlook is anticipated”.

Moreover, during the  Inflation Report presser last month, Governor Karahan stated that the MPC would  look at February and March data flow to gauge the persistence of the inflationary  shock in January.


FinMin Simsek has signalled increased support from fiscal policy for disinflation going forward

In a special interview ahead of the February inflation print, FinMin Simsek stated that inflation will return to its projected trend in March, and that the  monetary policy impact on domestic demand and inflation will work with a lag. He  added that the compound policy rate (at 56%) is well above professional  forecasters’ 12M ahead forecasts (<40%), supporting some real appreciation in the  Turkish lira. He expects an ongoing improvement in the external balance and  removal of election uncertainty as factors that will contribute to disinflation  towards targets. He ruled out broad-based tax increases and a faster pace of lira  depreciation post-elections.

We revise our inflation forecasts, and remove the rate cuts in 4Q24

Our current  forecast is for March inflation to decline to 3.5%M (SA) or 3.7%M (69.3%Y) as we  expect the monthly momentum in food and services inflation to ease somewhat. In  this case, we see it as more likely that the CBT sticks to “higher for longer”, and  relies more on quantitative and macroprudential tightening and increased  coordination with fiscal policy to bring about a further decline in inflation  momentum.

Given the beat in the February inflation print, and our upward revision to our GDP  forecast for this year (to 3.3%Y from 2.8%Y previously), we revise up our year-end  forecast to 43.6%Y from 42.4%Y previously. While our base case stands well above  the CBT’s path (36%Y mid-point, 42%Y upper band), it still sees a gradual decline in  seasonally adjusted monthly inflation to an average of 3%M (SA) in 2Q, 2.7%M (SA)  in 3Q and 2.4%M (SA) in 4Q based on “higher for longer” and a tighter policy mix  described above.

We remove the two rate cuts we had in November and December  in our base case and see the first rate cuts in 1Q25.

While we do not yet include an additional hike in April in our base case, the following signposts could lead to an upward revision to our rates path

  • The March MPC meeting (March 21) and its communication will be important. The MPC might give a stronger signal for an additional hike in April based on its leading indicators for March inflation.
  • We think that a March inflation print above 4%M (SA) or 4.2%M is more likely to prompt an additional hike in April ahead of the forecast revisions to be published in the Inflation Report on May 9. This would depend on other key indicators such as inflation expectations, and the pressure on the lira and reserves, among others.
  • Inflation expectations (currently at 43%Y for end-2024, and 38%Y for 12M ahead) will likely be revised up following the beats in 4Q GDP and February inflation. We think that the bigger the deviation of inflation expectations from the CBT’s forecast path, especially across a 12-month horizon, the higher will be the probability of a further hike in April, and possibly in May to anchor expectations, and to contain second-round effects.


Increased pressure on TL

  • There’s been increased pressure on the lira and the CBT’s net FX position since the start of the year. We calculate around US$13.7 billion net FX sales by the CBT this year as of March 4. While some of the increase in FX demand probably reflects temporary FX demand related to election uncertainty, the rest is likely related to the fall in real deposit rates, and FX demand related to the unwinding of the KKM, in our view. The CBT will likely introduce quantitative and macroprudential measures to address the latter, but depending on its effectiveness, the policy response might be strengthened by an additional rate hike should such pressures persist post-elections.


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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.