MNI CBRT WATCH: Inflation Fall Means Return To Easing Seen

The Central Bank of the Republic of Turkey is expected to announce a 250-basis-point cut in its one-week repo rate to 43.5% on Thursday, though there remains an outside chance of a 350bps reduction. (See MNI EM CBRT WATCH: Policy Rate Hold Seen; Cuts Resume From July)

The CBRT has held key interest rates at 46% since April’s 350bp hike, in the aftermath of the previous month’s political upheaval. 

But headline inflation has fallen from 35.41% in May to 35.05 % in June and month-on-month inflation has moderated. Market participants now see CPI inflation at 29.66% by yearend - fractionally above the CBRT’s target - and at 23.39% in 12 months’ time, according to central bank data for July. (See TURKEY: Inflation Estimates Edge Lower in Latest CBRT Survey)

Households’ 12-month inflation expectations remain somewhat higher, but here too the downward trend is confirmed, with Koc University Household Inflation Expectations Survey data for early July registering an improvement of 2 points to 61% between early June and July. (See MNI BRIEF: Turkish Household Inflation Expectations Decline)

While services momentum continues to be elevated, at 2.37% month-on-month, core goods inflation is easing and there is little sign so far that either domestic politics or geopolitical events in the region are worrying investors, 

Central bank reserves are growing, and the current account deficit has narrowed. 

While a larger rate cut cannot be ruled out, the Monetary Policy Committee under Governor Fatih Karahan has shown a bias towards caution and 250bp seems the likelier outcome.