The Turkish central bank’s decision to stay the course on interest rates for a fifth straight month aligned with market expectations but left global financial institutions divided on the future trajectory of the country’s monetary policy.
The Central Bank of the Republic of Türkiye (CBRT) held its benchmark one-week repo rate steady at 50% on Tuesday and repeated that it remains vigilant to inflation risks even as it expects disinflation to gain pace.
The bank gave little clue about when it might begin cutting its policy rate, which analysts generally expect to happen late this year. But in a hint of the timing of pending easing, the CBRT said it is increasingly focused on the alignment of inflation expectations and pricing with its own projections for the disinflation path.
Economists at Morgan Stanley said the bank’s statement signaled "an intention to keep rates higher for longer and reflect an aim to postpone expectations for easing steps to start in the near-term."
They said policymakers managed to deliver a "hawkish surprise" without changing interest rates or signaling any new tools.
The "alignment of inflation expectations and pricing behavior with projections has gained relative importance for the disinflation process," the CBRT said after its Monetary Policy Committee (MPC) meeting on Tuesday.
The bank last raised rates in March, by 500 basis points, capping an aggressive tightening cycle that began more than a year ago to rein in soaring prices. It has since held steady while vowing to hike more if the outlook worsens.
"Indicators for the third quarter suggest that domestic demand continues to slow down with a diminishing inflationary impact," the bank added.
Morgan Stanley economists suggested that a rate cut this year is unlikely, highlighting the importance of services sector inflation and expectations.
They stated that the bank's forward guidance clearly indicates that it is unlikely to begin easing before the monthly inflation trend sustainably falls to 1.5% and the gap between inflation expectations and the forecast range narrows.
Goldman Sachs has said it expects the first cut in September.
Citigroup economists don’t see that happening before November while they predict the CBRT ending the year with a rate around 45%.
Bank of America's base expectation is for a cut in December. However, the decision could be postponed to early 2024 or even brought forward depending on economic data, BofA Securities said in a recent note.
Timing the first rate cut will be crucial, given it will create expectations of further easing, it said.
"The reason for the central bank to cut rates ... (will be) to maintain tightness with a reasonably high real interest rate which depends on expectations of real sector and households. Hence, we expect the pace of cuts to be slow enough to make sure this tightness is preserved," it noted.
The Dutch banking giant ING said it sees room to cut in November or December, depending on the data and given that the relatively stable currency and normalization in domestic demand should support a decline in the underlying inflation trend over the remainder of the year.
In a Reuters poll last week, all 17 economists expected the bank to not ease until October at the earliest, with four forecasting October, four forecasting November, and five forecasting early next year.
The policy rate was expected to drop by 500 basis points to 45% by the end of 2024, according to the poll.
Annual inflation began dipping in June and touched 61.78% last month in what is expected to be a gradual, lasting decline. Earlier this month, the central bank maintained its inflation forecasts for end-2024 and -2025 at 38% and 14%, respectively, projecting it to fall to 9% by the end of 2026.
Morgan Stanley predicts reaching about 42.4% by the end of this year, while Citi's sees it at 45%.
The tight monetary policy stance could be maintained even with rate cuts, CBRT Governor Fatih Karahan said recently, also highlighting the importance of inflation expectations converging with the bank's own forecasts.
This, according to ING, implies that the bank will remain cautious, and the timing of cuts will depend on data and be gradual.
Since June last year, the central bank has raised its policy rate by a total of 4,150 basis points, reversing years of monetary stimulus to boost economic growth.
