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MNI CBRT Preview - September 2023: Another Large-Scale Hike

Executive summary:

  • Further tightening from the CBRT is expected this week, with the benchmark one-week repo rate expected to be raised by 500bps to 30%.
  • In addition to tightening via the key rate, the central bank will likely continue to tweak the rules and regulations around FX tools and KKM accounts to manage financial conditions.
  • Since the August decision, President Erdogan has backed the use of high interest rates, suggesting that the central bank now has the political support to continue with the large-scale rate hikes which are needed to tame inflation momentum and expectations.
See the full MNI Preview, with a summary of sell-side analyst views, here:

MNICBRTPrevSep23.pdf

President Erdogan said in early September that “tight monetary policy” was needed to slow inflation, an apparent shift in the leader’s unorthodox stance on monetary policy. “We will lower inflation to single digits with the support of monetary tightening and improve the current-account balance,” he said as his government unveiled economic targets for the next three years, comments which suggest that the CBRT’s latest steps will extend beyond next year’s local ballots.

On the data front, CPI jumped by 9.09% M/M in August, with the headline figure crossing at 58.94% Y/Y, surprising to the upside and recording a notable increase from +47.83% in July. Rising energy and food prices became the main drivers of headline inflation, while core inflation rose from +56.09% Y/Y to +64.85% Y/Y, with services inflation reaching its highest level on record at +79.7% Y/Y. Though the large-scale rate increase in August is expected to moderate demand-side price pressures, its effects will be felt with a lag and therefore strong pressures will likely continue to drive inflation higher in the near term, with the CBRT now expecting inflation to reach the upper end of its forecast at +62.0% and its most recent Market Participants Survey showing that year-end inflation expectations rose from 59.5% to 67.2%

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