MNI TURKEY WATCH: Hawkish Hold Seen, Inflation Not Yet At Peak

The Central Bank of Turkey is likely to hold interest rates at 50% when it meets on Thursday, but with inflation set to peak at around 75% in the coming months, governor Fatih Karahan will repeat his willingness to tighten policy further in order to reign in expectations.

The CBRT surprised markets when it raised rates by 500 basis points in March, when it said that a tight monetary stance would be maintained until it saw a “significant and sustained” decline in the underlying trend of monthly inflation is observed and until expectations converged to target.

Inflation rose to 68.5% in March from 67% the previous month, though policymakers anticipate disinflation will become established in the second half of the year. Governor Fatih Karahan said at the International Monetary Fund/World Bank spring meetings in Washington last week that the Bank remains on course to hit its 36% inflation target by the end of the year, and aims for single figures by the end of 2026.

“We have always signaled that we will do whatever is necessary,” Karahan said, “We have implemented much tighter measures than the markets expected, demonstrating how serious we are about disinflation."

On Thursday the Monetary Policy Committee is expected to state that while there is no immediate case for further hikes, rate rises will be necessary in the event that a “significant and persistent deterioration in inflation is foreseen.”

The CBRT has raised its key one-week repo rate by 4,150bp since last June as it seeks to moderate demand and stem lira depreciation. (See MNI EM INTERVIEW: Lira Key To Inflation - ex-CBRT's Ozatay)

The CBRT will accumulate reserves as much as it can depending on market conditions, Karahan said in Washington, though it will prioritise its inflation goal.

Despite being blamed by some for defeat in last month’s local elections of President Erdogan’s Justice and Development Party, Turkey’s monetary policy strategy has continued to receive government support.

Finance Minister Mehmet Simsek has said he is committed to helping the central bank via reduced fiscal spending, and said the benefits of the current “fully functional” policy mix will eventually become apparent. (See MNI EM INTERVIEW: CBRT Seen Easing Later In Year, Lira Permitting)