Türkiye | The CBRT avoids a major surprise

Summary

The CBRT reduced the policy rate by 100bps to 39.5%, parallel to the majority of the rate cut expectations of 100-150bps, with also a similar size of cuts in the corridor (38%-42.5%). We still maintain the view of gradual rate cuts going ahead, yet with increasing inflationary pressure.

Key points

• Key points:
• Given the increasing inflationary pressure since August, the CBRT underlines a decelerating inflation trend and more pronounced risk factors to the disinflation outlook through inflation expectations, and justifies today’s reduced pace of easing. However, the overall tone seems not to be too much concerned since their remarks on disinflationary demand conditions are repeated and the impact from food inflation is highlighted, instead of the stress over the services, and uncertainties from global factors previously.
• The underlying inflation trend increased in September and we nowcast again a seasonally high monthly consumer inflation nearly 3% for October, resulting in an annual inflation potentially above 33%.
• If an easing bias is maintained to keep rate cuts, a stronger reliance on macro-prudential measures will continue to weaken the monetary transmission mechanism with distributional effects.
• The removal of the reference to the contribution from the fiscal stance to the process also signals some exhaustion of the CBRT, and might be an acceptance of a slower disinflation trend, compared to the more aggressive inflation targets of next years.
• We maintain the view of gradual rate cuts going ahead, with a similar 100bps cut in Dec. Potentially worsening inflation expectations, second round effects and strong inertia will preserve the challenges ahead. In this regard, financial stability might still be prioritized in a way that risks are contained, but inflation stays high.

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