Turkey: Central bank to hold rates – ABN AMRO

Nora Neuteboom, Economist at ABN AMRO, explains that Turkey’s recently released data, such as the PMI, consumer confidence and industrial production, indicate that a significant rebalancing trend in economic activity is taking place.

Key Quotes

“External demand remains strong and we saw a swift decline in the current account deficit, while signs of deceleration in domestic demand became more visible. Given these deflationary developments, the central bank may want to wait and see what are the lagged effects of their bold action on 13 September and the inflation targeting plan by Albayrak.”

“Monetary policy often takes a few months to translate into lower inflation figures. Therefore, the central bank may want to monitor price stability closely in the coming two months and, if it deviates from the baseline scenario (20.8% end-2018),  take action in December. Thus far, while our year-end forecast for inflation is 24%, the 20.8% is not unattainable.”

“Furthermore, currency pressures have eased last week which may be another argument for the CBRT to wait. The central bank has not aimed at being ahead of the curve in the past, and we think they will not do that going forward.”

“Last but not least, president Erdogan’s opinion matters and he may try to persuade central bankers of his unorthodox views (higher rates lead to higher inflation). Given the reasons above, we think that the central bank will keep  rates unchanged at 24% on October 25. Markets are pricing in a small rate hike of 50-100bp.”