MNI CBRT WATCH: Hold Seen, But Hawkish Surprise Possible

The Central Bank of Turkey is expected to hold its key policy rate steady when it meets on Thursday, but higher inflation, a weaker currency, and high uncertainty mean a hawkish surprise is not out of the question.

Changes to other monetary policy tools, such as the overnight lending rate - may prove more attractive than adjusting the key one-week repo rate, should policymakers anticipate a “significant and persistent deterioration in inflation.”

March's political tensions following the arrest of the mayor of Istanbul forced policymakers to step in and defend a plummeting Turkish lira, with likely increases in food and energy prices this month expected to push April’s inflation figure upwards.

Year-end inflation expectations for 2025 edged up by 1.3 percentage points to 28.3% in February - versus the CBRT’s 24% target rate. While the Monetary Policy Council promises to “adjust the policy rate prudently on a meeting-by-meeting basis with a focus on the inflation outlook,” a rate hike might not be greeted with enthusiasm by Turkey’s political authorities.

The CBRT cut the key one-week repo rate by 250bps to 42.5% last month as February inflation moderated to 39.5%. (See MNI EM INTERVIEW: CBRT Keen To Avoid Hike, Government Row-Yalcin)

Rate-setters will hope that after a pause this month, inflation will return to the underlying trend established since May 2024, with easing resuming at the next policy meeting in June.