Türkiye | The Hawk That Dove: Surprising hurry of the CBRT to ease

Summary

The CBRT cut the policy rate by 300bps to 43%, above the 250bps consensus, with similar cuts in the corridor (41.5%-46%). The tone seems to turn dovish vs. June, signaling scope for continued cuts at each meeting, with the size reviewed with a focus on inflation outlook, despite ongoing price and financial stability risks.

Key points

• Key points:
• In contrast to June's communication, the CBRT appears more complacent about disinflation, citing July’s CPI rise as temporary and stressing demand’s growing negative impact on inflation—though we find such assessment premature at the start of monetary easing.
• Additionally, the CBRT removes the expression on its decisiveness regarding the tight monetary stance with all policy tools. Instead, it refers to only a tight monetary policy stance, which will be maintained until price stability is achieved.
• We estimate administered price hikes, including natural gas, alcohol, tobacco taxes, and fuel revisions may add 1pp to inflation, pushing July’s figure near 2.5%. Excluding these one-offs, the underlying trend may still slow, but uncertainty remains, especially with a stronger-than-expected start to the easing cycle. given the latest shocks and additional tightening thereafter, demand conditions have become more restrictive, supporting disinflation—though its composition appears insufficient to anchor expectations and meet inflation targets.
• On financial stability, while residents’ dollarization has eased slightly, it persists, evident in continued inflows to FX funds. Following the recent tax hike in TL deposits and funds, it will be key to enhance TL savings appeal and sterilize excess TL liquidity during the accumulation of reserves to prevent a sharp fall in ON TL rates.
• The communication of the CBRT, “the step size will be reviewed prudently on a meeting-by-meeting basis with a focus on the inflation outlook”, signals continued cuts going ahead, where we evaluate the size of the cuts will likely be reduced after September MPC. We still expect 36% policy rate at the end of the year, with reduced cuts to 200bps in October and December.

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