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Turkey Monetary Policy December 2023

Turkey: Bank hikes in December; signals imminent pause

At its 21 December meeting, the Central Bank of the Republic of Turkey (CBRT) raised the 1-week repo rate to 42.50% from 40.00%. The move matched market expectations and marked the smallest hike of the current monetary tightening cycle. Since June 2023, the CBRT has delivered seven consecutive hikes, bringing the cumulative increase to 3,400 basis points—its sharpest tightening cycle on record.

The CBRT stated that inflation remained in line with expectations despite ticking up in November. Moreover, it highlighted that domestic demand continued to cool due to the ongoing monetary tightening cycle, and reiterated that inflation expectations and the country’s external position are improving. Against this backdrop, the Bank decided to slow its hiking pace, deeming that interest rates are close to the level required to effectively curb inflation.

The Bank said that the tightening cycle will be completed soon. Nonetheless, it retained a hawkish tone, as evidenced by the statement that “monetary tightness will be maintained as long as needed to ensure sustained price stability”. Our panelists see the interest rate as near its peak; roughly half of our panel expect the Bank to deliver a final 250 basis point hike in January, while the rest see the Bank holding rates before launching the monetary policy easing cycle.

The next Monetary Policy Committee decision is scheduled for 25 January.

Muhammet Mercan, chief economist at ING, expects the CBRT to deliver one last hike in January:

“We expect inflation to remain elevated until mid-2024, with further increases above 70% on seasonal effects in January and unfavourable base effects in May. The second half of [2024], on the other hand, will likely see a sharp downtrend – reflecting this year’s high base and the further impact of tighter policy, pulling inflation down to 40-45% at year-end. In this environment, following one more hike in January, we expect the CBT to remain on hold until the third quarter of [2024].”

Meanwhile, Clemens Grafe and Basak Edizgil, analysts at Goldman Sachs, see the Bank holding rates in January:

“We expect inflation to rise to +65.0% in December purely on base effects and think core and noncore price pressures will continue weakening on a sequential basis. Consistent with this view, we think the Bank has now completed its tightening cycle unless there are upward surprises to the inflation and wage data.”

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