Turkey hits brake on monetary tightening, policy rate left unchanged at 45%

The Turkish central bank’s monetary policy committee (MPC) on February 22 announced that it had decided to leave its policy rate unchanged at 45%, bringing to an end to the tightening cycle applied with a series of consecutive hikes introduced since June last year when the benchmark stood at 8.5%. The decision was in line with market expectations (chart).

The underlying trend of official monthly inflation rose in January in line with the regulator’s inflation projections. Headline official annual inflation edged up, the accompanying statement released with the policy rate announcement noted.

The determination to maintain a tight monetary stance would continue to contribute to the Turkish lira’s (TRY’s) real appreciation process, which is a key element of disinflation, the MPC also said.

The committee assessed that the current level of the policy rate would be maintained until there was a significant and sustained decline in the underlying trend of monthly inflation and until there was a convergence of inflation expectations with the projected forecast range.

The monetary policy stance would be further tightened in the event of the inflation outlook anticipating a significant and persistent deterioration in inflation, it added.

The MPC, meanwhile, is set to continue with the implementation of macroprudential policies. 

Taking into account the lagged effects of monetary tightening, policy decisions would be determined in a way that would create monetary and financial conditions necessary to ensure a decline in the underlying trend of inflation, the committee said.

In June last year, following the appointment of Turkey’s post-election new economic team, the Erdogan regime launched the tightening process that brought the policy rate to 45% in January.

In January, the MPC assessed that the monetary tightness required to establish a disinflation course had been achieved.

It also stated that the current policy rate level would be maintained until there was a significant decline in the underlying trend of monthly inflation.

On February 8, the central bank kept its end-2024 official inflation estimate unchanged at 36% in its quarterly inflation report while new governor Fatih Karahan said that the central bank saw the official series peaking at 73% in May.

According to central bank deputy governor Cevdet Akcay, the 36% end-2024 official inflation “target” was ambitious, but the regulator, he said, was setting out to be ambitious. That tends to suggest that the MPC actually sees the end-2024 inflation figure at a higher level, but is nevertheless sticking with its previous estimate as the target level.

Liam Peach at Capital Economics said in a note to investors: “An extended interest rate pause is likely in our view over the coming months. With inflation likely to end the year at 30-35% (broadly in line with the CBRT’s [central bank’s] forecast of 36%), there is still a possibility that the central bank starts an easing cycle before the end of the year, which many analysts are expecting. But our baseline view remains that interest rates will stay on hold throughout this year and that rate cuts won’t arrive until early next year.”

On February 5, the Turkish Statistical Institute (TUIK, or TurkStat) said that Turkey’s consumer price index (CPI) inflation officially stood at 64.86% y/y in January versus 64.77% y/y in December and 38% y/y in June.

TUIK also posted 7% m/m official inflation for January.

Turkey’s finance minister, Mehmet Simsek, said in a tweet that TUIK would release significantly lower monthly inflation rates starting from the second half of the year.

According to Karahan, average official monthly inflation would decline to 1.5% in 4Q24.

On May 9, the central bank will release its next inflation report and updated forecasts.

The next MPC meeting is scheduled for March 21. As things stand, the rate-setters look set to stick with the 45% benchmark.

The global markets are not suggesting any notable turbulence. Turkey’s five-year credit default swaps (CDS) have fallen below the 300-level, while the yield on the Turkish government’s 10-year eurobonds remains below the 8%-level.

The USD/TRY rate is, meanwhile, still heading north. On September 21, the pair once again broke through the horizontal barrier set at the 27.00-level. The latest record high, registered on February 21, is 31.1842.

Since December 15, the Turkish government has returned to its ‘five/10 kurus (Turkish cents, pronounced as kurush) devaluation per day policy’. As of February 22, the daily tranche was being dug at around the 31.00-level. The annual rise in the USD/TRY pair rose to 64%.

Following the local elections to be held at the end of March, with Turkey’s policy rate at its peak, the course of the USD/TRY pair will be observed.

When the northward pull on the pair ends, the moment will be seen as signalling the beginning of portfolio inflows and the opening of the window for slowly building up lira papers.

Ahead of May, when official inflation will peak, the beginning of rate cuts (currently expected by many analysts in 4Q24) will be discussed.


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