Türkiye's central bank stuck to its tight monetary stance on Tuesday as it left its benchmark interest rate unchanged for the fifth straight month, reiterating that it remains vigilant to inflation risks even as it expects disinflation to continue.
In a hint of when borrowing costs might come down, the Central Bank of the Republic of Türkiye (CBRT) said it is increasingly focused on the alignment of inflation expectations and pricing with its own projections for the disinflation path.
The bank last raised the one-week repo rate 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 rates more if the outlook worsens, though analysts generally expect cuts to begin later this year.
The "alignment of inflation expectations and pricing behavior with projections has gained relative importance for the disinflation process," the bank said in a statement following its Monetary Policy Committee (MPC) meeting.
"Indicators for the third quarter suggest that domestic demand continues to slow down with a diminishing inflationary impact," it added.
A higher benchmark rate eventually leads to higher rates for auto loans, mortgages and other forms of consumer borrowing.
The Turkish lira strengthened to 33.81 against the U.S. dollar after the decision and stood at 33.82 at 11:19 a.m. GMT. It touched a record low of 33.84 earlier on Tuesday.
Annual inflation began dipping in June before touching 61.78% last month and is seen falling further with the impact of tight policy and a slowdown in domestic demand to stand at around 40% at the end of this year.
The bank on Tuesday said the underlying trend of monthly inflation rose slightly in July but remained below its second quarter average.
It repeated that it would maintain its tight monetary stance until "a significant and sustained decline in the underlying trend of monthly inflation is observed and expectations converge to the projected forecast range."
"Monetary policy stance will be tightened in case a significant and persistent deterioration in inflation is foreseen," the statement read.
Sticky services inflation
Since June last year, the bank has raised its policy rate by a total of 4,150 basis points, reversing years of monetary stimulus to boost economic growth.
Earlier this month, it 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. Economists predict it will reach about 42% by year-end.
The tight monetary policy stance could be maintained even with rate cuts, CBRT Governor Fatih Karahan said in a recent speech that also highlighted the importance of inflation expectations converging with the bank's own forecast range.
With further falls in inflation expected, the bank is expected to start cutting the policy rate later this year, according to economists.
However, any significant easing is not expected to come until next year.
In a Reuters poll last week, all 17 economists expected the bank to hold rates this month and 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.
The bank on Tuesday cited the lagged effects of the monetary tightening and reiterated that it remains "highly attentive" to inflation risks.
"The decisiveness regarding tight monetary stance will bring down the underlying trend of monthly inflation through moderation in domestic demand, real appreciation in Turkish lira, and improvement in inflation expectations," it said.
The bank noted that the high level of stickiness in services inflation, inflation expectations and geopolitical developments keep inflationary risks alive.
"While goods inflation is declining, improvement in services inflation is expected to lag."