CBRT will Likely Halt Tightening Cycle Transiently on October 26 MPC
![](https://adminmvp.continuumeconomics.com/storage/author/654a661065625.jpeg)
Bottom Line: After Central Bank of Republic of Turkiye (CBRT) continued strong monetary tightening on September 21 monetary policy meeting (MPC) by hiking the key rate by 500 bps to 30% to cool off inflation, squeeze demand and cut inflationary expectations, we expect CBRT will likely now temporarily pause at the October 26 MPC as the acceleration pace of the inflation slowed down and the weakening pace of TRY decelerated in September. The Bank will likely wait and see the lagged impacts of the strong tightening process after June over the economy, before tightening will resume in late 2023. We now forecast a policy rate of 35% for end 2023.
Figure 1: Key Rate (%), September 2020 – September 2023
Source: Datastream
Despite inflation remained on the upside in September (there are still signs that inflation will continue to spike in the upcoming months mostly due to deterioration in pricing behaviour), cost and demand pressures and slowing of the weakening Turkish Lira (TRY) in September, leaving the CBRT room to halt the tightening process temporarily.
To be more precise, rise in food and health prices appeared to have lost speed, while we think the lagged effects of wages and taxes hikes on inflation seemed partly weakened in September. Although services prices remained elevated due to seasonal factors related to the opening of schools, opening season is over as of October. The most concerning part of the story is the continued strong impacts of rising oil prices boosting energy items and transportation prices in the country.
Taking into account that CBRT vigorously increased the key rate by 500 bps to 30% at the September 21 MPC, and took measures to simplify and improve the existing micro- and macroprudential framework to suppress inflationary pressures, we suspect that CBRT may possibly wait and see this time. Given that the lagged impact of the tightening cycle is still feeding through, they will likely keep the rate at 30% until the next MPC scheduled at November 23 to see the course of the transition process. It is obvious that current level of interest rates will be not enough to steer inflation back to its medium term targeted point, which is 5%, but at least real interest rates are not as deeply negative anymore.
Another important indicator to closely watch has been the currency. USD/Turkish Lira (TRY) weakened by 28% between June, 1 and August, 31, clearly showing the strong loss of value of TRY after the presidential elections in May, while the weakening pace decelerated drastically as of September during when TRY weakened by a mere 2.6% against the dollar. Stabilization of TRY is very important in cooling down inflation given FX pass-through from a weak TRY, and we consider weaker fluctuations in September could give some space to CBRT for a temporary stop.
Of course, the contrary situation is also possible, as the CBRT seemed determined to cool off inflation as soon as possible after May elections, and there are still signs that inflation will continue to surge in the remainder of 2023. In a similar vein, CBRT appeared to remain concerned about the course of inflation and emphasized in its written statement on September 28 that, “(…) strong course of domestic demand and the stickiness of services inflation persist, the increase in oil prices and the ongoing deterioration in inflation expectations pose additional upside risks to inflation”. We continue to foresee upside risks emanating from increasing food and energy prices are high for the country, in addition to the weakening currency, and the expected hike in public spending before the 2024 local elections would likely lead to Q4 2023 inflation to soar to 69%.
Whether CBRT will stop on October 26 MPC or not, CBRT is expected to continue tightening in the remainder of 2023 until domestic demand will be suppressed, a weakening pace of TRY is evident, inflation will be partly controlled, and cost and demand pressures will be alleviated. As mentioned, we foresee that the rate will be kept at 30% at the next MPC before tightening would resume since CBRT would possibly wait to observe the lagged impacts of recent rate hikes and additional measures over the economy, during when inflation and the currency relatively allow.