Sixth Straight Rate Hike: CBRT Continued Strong Monetary Tightening
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Bottom Line: Despite we pencilled a 250 bps policy rate hike by Central Bank of Turkiye (CBRT) on November 23 MPC meeting, CBRT continued its monetary tightening cycle by lifting the key rate by 500 bps to 40%. This is the sixth straight rate hike by CBRT since May presidential elections, simply to fight against galloping inflation and weakening Turkish Lira (TRY). According to the written statement published, CBRT remained concerned about the strong course of domestic demand, the stickiness of services inflation, and geopolitical risks that keep inflation pressures alive, but it strongly signalled that the cycle will be completed in a short period of time if inflation would allow. We now expect CBRT to hike the rate to 42.5% in the last MPC of the year, which is scheduled for December 21.
Figure 1: Key Rate (%), September 2020 – November 2023
Source: Datastream
The CBRT raised the policy rate from 35% to 40% on November 23 MPC meeting to establish the disinflation course as soon as possible, to anchor inflation expectations, to control the deterioration in pricing behaviour and to squeeze demand, as inflation continues to bite with CPI surging to 61.36% annually and 3.43% monthly in October. One good news for the country is that the pace of the inflation slightly decelerated when compared to August and September, partly signalling the success of tightening process.
In a similar vein, CBRT recently cited the improvement in external financing conditions, continued increase in foreign exchange reserves, positive impact of demand rebalancing on current account balance, and the increase in domestic and foreign demand for TRY denominated assets showing the effectiveness of the traditional monetary policy.
MPC statement on November 23 was crucial in the sense that it indicated CBRT is planning to complete tightening cycle in the near term if the pace of the inflation would allow. The statement said that “The current level of monetary tightness is significantly close to the level required to establish the disinflation course”, and it added that “The pace of monetary tightening will slow down and the tightening cycle will be completed in a short period of time.”
According to CBRT's 2023-IV Inflation Report circulated on November 2, CBRT increased its inflation forecasts for the end of 2023 and 2024, and made a very limited downward update on its end-2025 forecast. The Central Bank lifted its inflation forecasts by 7 points for the end of 2023 with an increase from 58% to 65%. For the end of 2024, the projection rose by 3 points from 33% to 36%, while the forecast was reduced by 1 point from 15% to 14% for the end of 2025. Taking projected inflation at the end of 2024 into account, CBRT has now pushed the real rates into positive territory. From our perspective, this symbolic achievement can add to CBRT's credibility, and indirectly ignite capital inflow to accelerate in the medium term.
It appears the current process is also backed up by president Erdogan. Speaking on his return from Algeria to Turkiye on November 21, Erdogan advocated the current tightening cycle and mentioned that “The disinflation program we've implemented will highly likely lead to a real appreciation of the lira. So the Turkish lira depreciation has come to an end.”
We continue to foresee upside risks emanating from increasing food and energy prices coupled with strong demand and geopolitical tensions remain high for the country, as the expected hike in public spending before the 2024 local elections would likely lead to Q4 2023 inflation to stay high around 69% by the end of the year.
Despite risks, we think CBRT continues to gain investor credibility thanks to recent hikes and decent communications while Turkish economic actors need to be patient as the lagged impacts of the tightening cycle are still feeding through and time is required for disinflation course to be established.