The Monetary Policy Committee (MPC) raised the policy rate (one-week repo auction rate) from 42.5 percent to 45 percent. Here is our take on the CBRT’s rate decision and its implications for the rest of 2024:
It pointed out that inflationary pressures are alive: The Bank emphasized the current level of domestic demand, rigidity in services prices and geopolitical risks as continuing inflation pressures. It added that the improvement in inflation expectations and pricing behavior was limited.
CBRT announced that the required level of monetary tightness has been reached. In the near term, the bank is not likely to deliver further rate hikes. 45 percent will remain in place for as long as necessary. The “necessary condition” is defined by the bank as a significant decline in the underlying trend of inflation and convergence of inflation expectations to the forecasted range.
While ongoing inflation pressures are accepted, if inflation risks remain on the upside, the bank promises to review the level of monetary tightness. Such wording does not directly imply the possibility of another rate hike.
There is no mention of an interest rate cut.
While keeping the interest rate level at 45 percent for some time, the CBRT will strengthen monetary tightening by diversifying existing sterilization tools.
Hence for the remaining months of 2024, the CBRT’s MPC text tells:
-The Bank is not in favor of another rate hike.
-On the other hand, the CBRT is inclined to keep the policy rate at 45 percent for longer than reflected in the Market Participants’ Survey, in order to combat the buoyant inflation.
-The course of fiscal policy will affect domestic demand and the CBRT will wait and watch fiscal performance during most of 1H24. After the shocking December fiscal data, the level of public spending in the first quarter of 2024 has become an important benchmark. A tight monetary policy that is not accompanied by a tight fiscal policy is unfavorable for the CBRT in terms of limiting domestic demand. Since the level of discipline in public expenditures after the local elections will be decisive on domestic demand, the CBRT will monitor the course of fiscal policy while making its interest rate decision.
-If necessary, it will strengthen its monetary policy tightening path through further quantitative measures.
For now, the market expectation for end-2024 CPI inflation is 43-44 percent, significantly higher than the CBRT’s expectation of 36 percent. Currently Turkey’s CPI inflation is at 65 percent and is expected to peak at 70 percent in May 2024 before starting to slide with the help of the base year effect from mid-2024 until the year-end.
Similarly, while the bank’s end-2025 CPI inflation expectation is 14 percent, the market’s is around 25 percent.
All this tells us that the bank should not trigger immature rate cuts this year given the strength of inflationary forces and expectations.
Below is the CBRT’s rate hike decision announcement:
The Monetary Policy Committee (the Committee) has decided to raise the policy rate (the one-week repo auction rate) from 42.5 percent to 45 percent.
In December, headline inflation increased in line with the outlook presented in the last Inflation Report. The existing level of domestic demand, stickiness in services inflation, and geopolitical risks keep inflation pressures alive. On the other hand, recent indicators suggest that domestic demand continues to moderate in line with the projected disinflation process as monetary tightening is reflected in financial conditions. The Committee also assesses that inflation expectations and pricing behavior continued to show signs of improvement. External financing conditions, strengthening in foreign exchange reserves, rebalancing in current account balance, and demand for Turkish lira denominated assets continue to contribute to exchange rate stability and the effectiveness of monetary policy. In light of these developments, the decline in the underlying trend of monthly inflation continued.
Taking into account the lagged impact of monetary tightening, the Committee assesses that the monetary tightness required to establish the disinflation course is achieved and that this level will be maintained as long as needed. The Committee assesses that the current level of the policy rate will be maintained until there is a significant decline in the underlying trend of monthly inflation and until inflation expectations converge to the projected forecast range. The Committee will reassess the stance of monetary policy if notable and persistent risks to inflation outlook emerge.
To increase the functionality of market mechanism and strengthen macro financial stability, the Committee continues to simplify and improve the existing micro- and macroprudential framework. In line with the simplification process, the Committee will strengthen the monetary transmission mechanism in the face of any potential excess volatility in credit supply and deposit rates through macroprudential policy. In addition to policy rate decisions, the Committee will continue to implement quantitative tightening by extending the sterilization tools at its disposal in order to support the monetary tightening process.
Taking into account the lagged effects of monetary tightening, the Committee will continue to determine its policy decisions in a way that will create monetary and financial conditions necessary to ensure a decline in the underlying trend of inflation and to reach the 5 percent inflation target in the medium term.
Indicators of inflation and underlying trend of inflation will be closely monitored and the Committee will continue to decisively use all the tools at its disposal in line with its main objective of price stability.
The Committee will continue to make its decisions in a predictable, data-driven and transparent framework.
The summary of the Monetary Policy Committee Meeting will be released within five working days.