MNI CBRT WATCH: No July Repeat, But 250BP Cut On Table

The Central Bank of Turkey is likely to cut benchmark interest rates by 200 basis points or more on Thursday, after Governor Fatih Karahan stressed that inflation is likely to continue to fall despite higher-than-expected GDP growth.

August’s disappointing inflation print of 33.0%, down just 0.5 percentage point compared with July, combined with higher-than-expected Q2 GDP growth of 4.8% year-on-year and accelerating household spending, had led analysts to trim predictions for easing this month to 200 basis points after July’s 300bp cut. But dovish comments by Karahan prompted a rethink, with the median forecast of surveyed institutions now predicting a 250bp move that would leave the one-week repo rate at 40.5% according to Bloomberg HT.

The decision will come after last week’s court ruling over the appointment of a senior opposition leader, which could reduce the chances of challenges to President Recep Tayyip Erdogan and was followed by a temporary ban on public gatherings across several districts in Istanbul, and which prompted a 7.5% fall in Turkish stocks and a 2ppt spike in two-year yields. Analysts have pointed to another court ruling due Sept 15 as a possible further risk event for Turkish assets.

In an interview published before the court move, Karahan said that "the components of the GDP data showed that demand conditions continue to support disinflation,” and added that the central bank “[hasn’t] allowed for the deterioration of inflation expectations nor for demand to disrupt disinflation and we won’t allow it.” 

The CBRT has an interim inflation target for the end of 2025 of 24%,then 16% by the end of 2026, but it projects inflation will be 25-29% this year, and 13-19% next year.

While the central bank retains a data-dependent, meeting-by-meeting approach to setting policy, anything less than 200bp of cuts this month would be a surprise. It remains to be seen whether the bank will continue its stance of maintaining a 300bps corridor between the policy rate, currently 43%, and the overnight lending rate at 46%. (See MNI EM CBRT WATCH: CBRT Cuts 300Bp as Underlying Inflation Flat)