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MNI POLICY: CBRT Likely To Cut In December As Past Hikes Bite

Output gap models provide clues as to the Central Bank of the Republic of Turkey's Dec 26 rates decision.

MNI (LONDON) - Weakening demand pressures and stronger disinflationary forces as the lagged effect of previous rate hikes kick in mean the Central Bank of the Republic of Turkey is likely to cut interest rates at its December 26 meeting, MNI understands. (See MNI EM CBRT WATCH: CBRT Holds At 50%, Says Could Adjust Rates)

In a blog post on Tuesday the CBRT noted that Turkey’s average output gap has steadily declined from the high positive levels of Q2 2023, with the results of eight key models removing a significant degree of uncertainty, and with the decline recently becoming more pronounced. (See MNI EM INTERVIEW: Conditions Right For CBRT Cut -Ex-Deputy Turhan)

“Notably, while only one out of the eight indicators was negative in the last quarter of 2023, six had turned negative by the third quarter of 2024,” the post explains. “Recent output gap indicators suggest that demand continues to slow down, reaching disinflationary levels.” (See MNI EM INTERVIEW: CBRT May Cut To Boost Growth-Ex-Gov Official)

The timing of the blog’s publication is understood to be a signal to markets that the central bank is ready to lower the policy rate (1W-repo rate) from the current level of 50% - where it has been since March - as it seeks to balance demand.

However, Governor Fatih Karahan is expected to stress that tight monetary policy and a negative output gap remain key to ensuring inflation converges to the Bank’s intermediate targets of 21% for 2025 (with an upper band limit of 26%) and 12% for 2026 (upper band limit 17%).

Economists are divided as to when the CBRT will start its easing cycle, with some expecting it to wait until early next year.  (See MNI EM INTERVIEW: CBRT To Cut In Q1 2025 - Ex-Official Ozatay)

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MNI (LONDON) - Weakening demand pressures and stronger disinflationary forces as the lagged effect of previous rate hikes kick in mean the Central Bank of the Republic of Turkey is likely to cut interest rates at its December 26 meeting, MNI understands. (See MNI EM CBRT WATCH: CBRT Holds At 50%, Says Could Adjust Rates)

In a blog post on Tuesday the CBRT noted that Turkey’s average output gap has steadily declined from the high positive levels of Q2 2023, with the results of eight key models removing a significant degree of uncertainty, and with the decline recently becoming more pronounced. (See MNI EM INTERVIEW: Conditions Right For CBRT Cut -Ex-Deputy Turhan)

“Notably, while only one out of the eight indicators was negative in the last quarter of 2023, six had turned negative by the third quarter of 2024,” the post explains. “Recent output gap indicators suggest that demand continues to slow down, reaching disinflationary levels.” (See MNI EM INTERVIEW: CBRT May Cut To Boost Growth-Ex-Gov Official)

The timing of the blog’s publication is understood to be a signal to markets that the central bank is ready to lower the policy rate (1W-repo rate) from the current level of 50% - where it has been since March - as it seeks to balance demand.

However, Governor Fatih Karahan is expected to stress that tight monetary policy and a negative output gap remain key to ensuring inflation converges to the Bank’s intermediate targets of 21% for 2025 (with an upper band limit of 26%) and 12% for 2026 (upper band limit 17%).

Economists are divided as to when the CBRT will start its easing cycle, with some expecting it to wait until early next year.  (See MNI EM INTERVIEW: CBRT To Cut In Q1 2025 - Ex-Official Ozatay)