Turkey: Central Bank leaves policy rate unchanged in October
Bank remains on hold, meeting market expectations: At its meeting on 17 October, the Central Bank of the Republic of Turkey (CBRT) decided to keep the 1-week repo rate at 50.00%. The decision aligned with market expectations and marked the seventh consecutive hold.
Slowing domestic demand likely dissuaded a hike: The CBRT noted that there was a slight increase in the underlying inflationary trend in September. Additionally, it highlighted that uncertainty regarding the pace of improvement in inflation had also increased, calling for caution. That said, it stated that domestic demand continued to slow in Q3—inching closer to disinflationary levels—which likely dissuaded a hike. Moreover, the Bank reiterated that it expects services inflation to cool in Q4.
Monetary easing cycle on the horizon: The Bank stated its commitment to maintaining a tight monetary stance until inflation moderates significantly, reiterating that “monetary policy tools will be used effectively” in the event of a significant and persistent deterioration in the inflation outlook. Slightly over half of our panelists expect the Bank to kick off its monetary policy easing cycle by end-2024, while the rest forecast the CBRT to start reducing rates in 2025, with our Consensus pointing to a reduction of around 2000 basis points by end-2025. The Bank is set to meet again on 21 November.
Panelist insight: Muhammet Mercan, chief economist at ING, commented:
“While the statement turned cautious as a result of increasing uncertainty surrounding the pace of inflation improvements, the bank reiterated its expectation that the disinflation process will gain strength with a drop in services inflation in the last quarter. Given this backdrop, we think that there is still room to launch a rate cut cycle in December, depending on the October and November inflation data. The pace of the ongoing slowdown in economic activity will also play an important role in the timing here.”
Meanwhile, Clemens Grafe and Basak Edizgil, economists at Goldman Sachs, were more hawkish:
“With sequential inflation remaining well above the level we think is necessary for the [Central Bank] to start lowering its policy rate, we pushed our forecast for the timing of the first rate cut from November to January next year.”