MNI CBRT WATCH: Policy Rate Hold Seen; Cuts Resume From July

The Central Bank of the Republic of Turkey is expected to leave its policy rate at 46% this month, but with last month’s inflation data again confirming the downward trend from a year before, easing looks set to resume in July. 

The pace of annual CPI growth fell back again over April to May - from 37.9% to 35.4% - with month-to-month inflation almost halving over the same period, to 1.53%.

Such downside surprises - especially after the turmoil of March, which led the Bank to hike rates by 350bps in April  - will give policymakers greater confidence in their chances of ending the year if not at their 24% year-end projection, then certainly close to the 29% upper bound of the target range. (See MNI EM CBRT WATCH: Turkey CenBank Raises All Three Interest Rates)

That has raised the possibility the CBRT could cut the key one-week repo rate by up to 250bps at every meeting from July to December, subject to political developments, to leave it in the region of 36% by the end of the year. (See MNI EM INTERVIEW: CBRT To Cut 600bps After June Hold -Turhan)

The CBRT remains attentive to upside risks, which include FX-passthrough, domestic inflation expectations and domestic demand, and can be expected to maintain its hawkish tone, even as a pause in the easing this month paves the way for future rate cuts.

According to the most recent Inflation Report, “upside and downside effects offset each other with the policy response,” meaning a reduction in the overnight lending rate from 49% to 46% - reversing the hike of April 17 - becomes more likely this week should the bank look to stand pat on the policy rate.