Türkiye | The CBRT stays optimistic

Summary

The CBRT kept the policy rate unchanged at 37%, in line with market expectations, missing another opportunity to deliver a positive surprise. The CBRT appears to consider existing measures sufficient and views conflict-related risks as temporary, despite the recent clear deterioration in inflation expectations.

Key points

• Key points:
• The rebound in reserves, the decline in the risk premium, and the relatively low dollarization trend among residents on top of the likelihood of a ceasefire may have led the CBRT to stay on hold.
• There appears a clear deterioration in inflation expectations. However, the CBRT follows an intention to monitor the secondary effects of geopolitical developments on inflation amid a slowdown in activity -suggesting that a pro-growth bias may currently be somewhat more pronounced.
• Considering the ongoing worsening in the external balance, the pressure on reserves and the exchange rate may continue. Moreover, we expect the inflation trend in April to deteriorate, which is also emphasized by the CBRT in the policy statement, and annual inflation to remain around 32% till July.
• Despite rising risks, today's decision suggests that a pro-growth bias would be maintained and the CBRT might start preemptively easing when conditions allow.
• We expect the funding rate to gradually normalize -possibly starting in June- and move closer to the policy rate. Subsequently, limited rate cuts could begin as early as July. By year-end, based on current forward prices on energy, we expect year-end CPI to materialize at 28.5% and the policy rate to decline to at most 35%.

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