MNI CBRT Review: December 2021 - CBRT Hits Pause on Its Easing Cycle

Executive Summary

• CBRT Reduced key rate -100bp to 14.00% in line with expectations, potentially signalling the end of its easing cycle after 500bp in cuts since October.
• Inflation continued to be assessed as transitory due to supply-side factors, with the MPC agreeing to monitor the situation in 1Q22 and reassess all aspects of the policy framework during that period
• Surging inflation in 1H22 to 30-40% y/y should keep TRY assets under pressure and force the CBRT’s hand in terms of making policy changes to address the self-fulfilling spiral of TRY depreciation & higher inflation

Full Review Here:

CBRT Review 17.12.21.pdf

While the end of the easing cycle should lend some mild support to TRY to potentially slow (but not stop) the current speed of depreciation, deeply negative real rates set against in a tightening external environment and an expected surge in inflation should continue to support selling pressures over the medium-term in the absence of moves to re-establish positive real rates. TRY assets will remain sensitive to headline risks from Erdogan going into the new year, but more notably to substantial inflation pressures in the pipeline with headline forecast to rise to 30-40% y/y in 1H22, spurred on by delayed FX passthrough and the new 50% increase to Turkey’s minimum wage.