The Turkish central bank kept its key policy rate, also known as the one-week repo rate, unchanged at 50% during its 10th committee meeting this year on Thursday, placing a cautious tone with no clear sign of easing as it cited a "slight increase" in the underlying trend of inflation.
The Central Bank of the Republic of Türkiye (CBRT) extended its pause for the seventh month, in line with market expectations amid a surprise monthly inflation uptick in September, despite the continued decline of headline inflation.
"In September, the underlying trend of inflation posted a slight increase," the bank said after its Monetary Policy Committee (MPC) led by Governor Fatih Karahan.
"Indicators for the third quarter suggest that domestic demand continues to slow down, approaching disinflationary levels," it added.
The annual inflation rate dipped to 49.4% last month from nearly 52% in August and sharply when compared to 75.45% in May.
The central bank’s favored gauge, the monthly inflation advanced 2.97%, compared to 2.47% from July to August.
The committee in its statement reiterated the previous message, saying it "remains highly attentive to inflation risks" and that the tight monetary stance "will be maintained until a significant and sustained decline in the underlying trend of monthly inflation is observed, and inflation expectations converge to the projected forecast range."
The Turkish central bank lifted its key rate by 4,150 basis points from last June through March to contain elevated inflation, which as a result in September has dropped below its policy rate for the first time since 2021.
"While core goods inflation remains low, the improvement in services inflation is expected to occur in the last quarter," the central bank said.
Officials and the central bank have often reiterated the stickiness of the services inflation, which has proved to be an issue globally following the COVID-19 pandemic.
The September inflation data revealed the price increases were led by housing and education, while the surge in food and nonalcoholic groups of goods fell below headline inflation.
"However, the uncertainty regarding the pace of improvement in inflation has increased in light of incoming data. The committee noted that inflation expectations and pricing behavior continue to pose risks to the disinflation process," the central bank said on Thursday.
Deputy Governor Cevdet Akçay in a recent statement for The Economist said: "We will stay tight until the underlying trend of monthly inflation comes down on a sustainable basis."
All polls recently, including those conducted by Anadolu Agency (AA), Reuters and Bloomberg News anticipated the bank to keep the rates on hold again this month.
Rate cut expectations
Some analysts, as well as major Wall Street banks, moved their expectations for the first rate cut to January next year from November in the wake of the latest inflation data.
Reuters poll respondents foresee a 250 basis point cut by the year-end, similar to the median of AA economists in the survey shared on Monday.
The drive to cool prices, however, is expected to lower gross domestic product (GDP) growth to average 3% this year and next, according to the median of 42 economists in the Oct. 8-14 Reuters poll.
That compares to the government's prediction of 3.5% GDP growth this year and 4% next year, in its three-year policy road map.
Top officials earlier noted there might be a "temporary" slowdown in the growth, underscoring however, that the top priority is to lower inflation.
"Monetary policy tools will be used effectively in case a significant and persistent deterioration in inflation is foreseen," the CBRT said.
"Indicators of inflation and underlying trend of inflation will be closely monitored, and the Committee will decisively use all the tools at its disposal in line with its main objective of price stability."