Türkiye | CBRT reducing hawkishness with a high level of prudence

Summary

The CBRT kept the policy rate (one-week repo, 46%) and the width of the interest rate corridor (44.5%-49%) the same, surprising the market expectation of a cut in the upper bound of the corridor.

Key points

• Key points:
• Despite the improvement in the inflation trend in recent months (including June), the CBRT remains completely cautious against potential effects of the geopolitical developments and the rising protectionism in global trade on the external side, and inflation expectations and pricing behavior staying above the targets on the domestic front.
• The communication saying that ‘the monetary policy stance to be tightened’ is changed to “all monetary policy tools will be used effectively”, in case a significant and persistent deterioration in inflation is foreseen. Given the similar change back in September 2024, we understand the CBRT might be getting prepared for an easing also in the policy rate but this time with a higher level of prudence highlighting the effort to adjust the policy rate on a meeting-by-meeting basis with a focus on the inflation outlook.
• Given the increased uncertainties on geopolitics added to the domestic factors, the CBRT preserves its flexibility on the funding rate by not changing the width of the corridor.
• The reference of monetary transmission mechanism to be supported via additional macroprudential measures, in case of unanticipated developments in credit and deposit markets, might be referred to a preference of some fine-tuning in a targeted way in those macro-pru while keeping real interest rates relatively high.
• Following the normalization in funding via the policy rate (46%) as of June 12th, we expect the CBRT to pursue a carefully calibrated rate-cutting cycle starting from July with 300bps.

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