No Surprises: CBRT Held Key Rate Stable at 50% on November 21
Bottom Line: Central Bank of Turkiye (CBRT) kept the policy rate stable at 50% for the eighth consecutive month on November 21. In its press release, CBRT highlighted that tight monetary stance will be maintained until a significant and sustained decline in the underlying trend of monthly inflation is observed and implied slowing inflation could soon justify a cut. We continue to foresee that the policy rate will be held unchanged at 50% on December 26 as slowing trend in CPI decelerated in September and October, and the policy outlook has been blurred in recent months due to higher-than-forecast inflation prints. We expect cautious and hawkish CBRT to start cutting rates in Q1 2025, if inflation trajectory allows.
Figure 1: CPI, Core Inflation (YoY, % Change) and Policy Rate (%), February 2023 – November 2024
Source: Continuum Economics
As we anticipated, the CBRT decided to hold the key rate stable at 50% on November 21 MPC meeting basically to cool off the elevated inflation. According to the Bank’s assessment, inflation expectations and pricing behavior continue to pose risks to the disinflation process.
Taking into account that the inflation deceleration slowed down in September and October blurring the policy outlook, CBRT indicated that unprocessed food inflation elevated due to temporary supply conditions while core goods inflation remained low. (Note: CPI cooled off to 47.8% y/y in October from 49.4% y/y in September). "The tight monetary stance will be maintained until a significant and sustained decline in the underlying trend of monthly inflation is observed, and inflation expectations converge to the projected forecast range," the bank stated. CBRT also implied slowing inflation could soon justify a cut.
After CPI softened in Q3 ignited by lagged impacts of aggressive tightening, moderation in domestic demand, and relative TRY stability underpinning the inflation relief, we envisage that inflation will continue decelerate during the rest of Q4, but the extent of the decline will be determined by administrative price and tax adjustments. Another important news to follow will be the minimum wage hike in early 2025. On November 20, President Erdogan pledged that minimum wage increases will continue to outpace inflation in 2025 and that workers' purchasing power would be safeguarded amid lingering price pressures. We think the rate of the pay hikes will be likely a key determinant of inflation in 2025.
Seeing that fall in inflation will not be as fast as expected, CBRT decided to hike its end-2024 and end-2025 inflation expectations on November 8 as CBRT governor Fatih Karahan adopted a different tone earlier this month. According to the inflation report circulated on November 8, CBRT lifted the inflation forecast for the end of 2024 from 38% to 44%, and from 14% to 21% for the end of 2025.
As we highlighted in September outlook, we continue to foresee end-year inflation will likely hit around 43-44% despite government sees end 2024 inflation of 41.5% in the updated medium-term program (MTP). We think stickiness in services inflation, deteriorated pricing behavior, and geopolitical risks keep inflation pressures alive in Turkiye.
Taking into account that elevated inflation will continue to put pressure on CBRT to resume tightening cycle in the upcoming months, we continue to foresee CBRT to hold the key rate constant at 50% through the end of 2024. We expect cautious and hawkish CBRT to start cutting rates in Q1 2025 if inflation trajectory allows in Q4 2024 and Q1 2025. It is worth noting that the pressure has been growing on the central bank from exporters and industrialists to start lowering its rates to reverse a marked slowdown in the economy, and this will also be a factor of consideration for CBRT.