Türkiye | The CBRT Sees a Transitory Shock, Stays Cautious

Summary

The CBRT maintained the policy rate (37.0%) and the bands of the interest rate corridor (35.5%-40.0%), parallel to the expectations. The CBRT seems to view the recent geopolitical risks as temporary and believes its current policy toolkit is sufficient to mitigate these risks for now.

Key points

• Key points:
• Led by the conflict in the Middle East, risks over the financial stability have already led the CBRT to take different timely measures and the average cost of funding has been hiked to 40% as of March 2nd. Likewise, coordinated fiscal measures have been introduced to contain risks on the inflation outlook.
• Financial stability remains the key priority, as the reference to potential additional monetary tightening was linked to a significant and persistent deterioration in the inflation outlook -potentially driven by recent developments- rather than to deviations of inflation from the interim targets.
• The CBRT does not provide any guidance for March inflation outlook and regarding that its potential next steps. Instead, they give the impression that they have already taken the right steps and from now onwards they aim to closely monitor the effects of geopolitical developments on the inflation outlook through the cost channel and economic activity.
• We construct our baseline with a short-lived conflict with 4-5 weeks duration, adding 1-1.5pp upside risk on our 25% year-end inflation forecast. In this regard, we assume additionally tightened monetary stance, sliding-scale fuel pricing mechanism, and a relatively stronger currency outlook might offset such risk. However, a conflict lasting longer could add renewed pressure; therefore we will reassess our projections in line with the evolution of geopolitical risks and domestic policy responses.
• Should the shock de-escalate, the CBRT may gradually steer the average funding cost initially back toward the policy rate, potentially depending on the duration of conflict. In our baseline, we anticipate rate cuts to resume in June, with gradual 100bps cuts at subsequent meetings, bringing the policy rate to 32% by year-end.

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