Turkey: CBRT to begin very gradually easing cycle late in 3Q – BBVA

On Thursday, the Central Bank of Turkey (CBRT) kept the policy interest rate (one-week repo) unchanged at 19%, as expected by market participants. Analysts at Research Department at BBVA point out that given the worsened inflation outlook, the central bank tries to manage by eliminating any early rate cut expectations. They expect an easing cycle only very gradually late during the third quarter and end the year with a 16% policy rate. 

Key Quotes: 

“The CBRT acknowledges that the decelerating impact of the monetary tightening on credit and domestic demand has begun to be observed. Yet, given the high levels of inflation and inflation expectations, the CBRT underlines the need to keep the current monetary policy stance until the significant fall in the April Inflation Report’s forecast path is achieved.”

“The CBRT once again tries to eliminate any early rate cut expectations. Led by strengthening cost push factors, supply side constraints on pandemic, decelerating but still effective domestic demand and continuing pass-thru impact, we expect consumer inflation to fluctuate around 17% till November before declining to 15% at the end of the year.”

“We expect the CBRT to start an easing cycle only very gradually in late 3Q and end the year with 16% policy rate.”

“Even in a gradual currency depreciation pattern, the peak in CPI could still be experienced in the coming period depending on the price adjustments once the economy is reopened in late May. Therefore, worsened inflation outlook requires the CBRT to be more cautious, which the CBRT tries to manage right now by eliminating any early rate cut expectations.”