Turkey Central Bank:  No rate change expected today

Turkey’s central bank (CBRT) is expected to keep its interest rates steady for the second consecutive month Thursday amid price pressures, surveys have shown, while a cut is not on the horizon until at least the third quarter.


The Central Bank of the Republic of Turkey (CBRT) held its key policy rate – the one-week repo rate – steady at 19% last month and pledged to keep it above inflation, though it also removed a pledge from a month earlier to tighten further if needed.


The delayed expectations of a rate cut suggest that the new Governor Sahap Kavcioglu, who promised that the policy rate will remain above inflation to maintain a strong and disinflationary impact, has managed to convince markets that an early rate cut will not be delivered.


All 18 participants in a Reuters poll last week estimated the central bank would keep its policy rate unchanged.


Out of 15 who responded to a question about the timing of a rate cut, 10 expected the first cut in the third quarter, while two expected it in the second and three in the fourth.


In last month’s poll, five people expected a cut in the second quarter and seven in the third, while two expected it in the fourth quarter.


Morgan Stanley forecast last week that the central bank would keep its interest rates on hold until the fourth quarter due to price pressures.


“Given high inflation and the commitment to positive real rates, we see rates on hold on May 6 and beyond,” said Morgan Stanley’s Alina Slyusarchuk in a note to clients.


Turkish annual inflation climbed to 17.14% in April to its highest level in nearly two years, official data showed, driven by a depreciation in the Turkish lira and pricy commodity imports, pressuring the new central bank chief to keep policy tight.


In March, inflation stood at 16.19%. It was last this high in May 2019.


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Kavcioglu has sought to convince onlookers that he will be as decisive as his predecessor, Naci Agbal, in bringing down inflation to a 5% target over the next three years.


Producer prices were also up 35.17% year-over-year in April, from 31.20% in March. Higher producer prices are often passed on to consumers.



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Presenting the quarterly inflation report last week, the central bank estimated that inflation would peak in April and decline to 12.2% by year-end.


Some analysts said it would peak in April and enter a downward trend in the aftermath, while some said it could keep rising into May or even June and that the high levels of inflation are likely to keep the central bank from cutting its policy rate.


Among the 12 economists who participated in the Reuters poll for the year-end policy rate, the median estimate was 16%, with forecasts ranging between 12% and 17%.


CBRT’s monthly expectations survey reveal inflation forecasts rising across a broad horizon ranging from 12 months to 10 years, at the end of which CPI will only decelerate to 6.45% vs the long-term inflation target of 5%.


Chronic currency instability passing through to import prices and potential external shocks from the troubled relationship with US, in the guise of more CAATSA sanctions could also lead to higher inflation via weaker currency.


The big question mark is when the country will manage to end its Covid-19 outbreak, at the end of which domestic demand is expected to recover rapidly.  If the lockdowns and travel restrictions can be lifted in early summer, Turkey will witness a deluge of tourists, which will add substantially to domestic demand.  In case of such an event, CPI could be expected to rapidly converge to PPI, that is companies would boost their eroded profit margins by reflecting cost hikes to final prices.


In that scenario, rate cuts would become improbable durign the year.


The counterfactual is a quick diplomatic deal with US in summer, which will re-start foreign financial flows into the country, strengthening the currency and reversing pass-through to inflation. Only in that eventuality will CBRT be able to ease monetary policy without creating currency turmoil and  inflation hiccups.


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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 www.paraanaliz.com and has contributed to the financial daily Referans and the liberal daily Radikal.