CBRT Preview: No Action Despite Plummeting Real Rates

Executive Summary:

• Firmly expected to keep policy rates unchanged at 14.00% in August
• Expected to look through inflation nearing 80%
• Rate hikes remain a tail risk, with the bank board unwilling to tighten policy ahead of the election cycle next year

CBRT August.pdf

Governor Kavcıoğlu has overseen the CBRT’s easing cycle of 500bps of rate cuts since appointment in March 2021. Markets remain of the view that the Central Bank operates under considerable political pressure during this rapid inflationary cycle.

The July policy statement stated that inflationary pressures were caused by energy prices due to the geopolitical landscape, alongside negative supply shocks, adding that recessionary risks have increased, however tourism remains robust and the key factor in improving the current account, following the deficit over tripling to USD 3.46 bln compared to June 2021.

The use of “temporary” was dropped from the description of pricing formations (“not supported by economic fundamentals”) driving up Turkish inflation as well as the expectation of deflationary base effects. Despite not materialising into a hawkish shift, the CBRT is evidently seeing this inflationary phase as less transitory.