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Turkey Monetary Policy November 2023

Turkey: Bank hikes in November; signals rates near peak

At its 23 November meeting, the Central Bank of the Republic of Turkey (CBRT) raised the one-week repo rate to 40.00% from 35.00%. The move matched the previous month’s hike and surprised markets on the upside; most analysts expected a 250 basis points increase. Since June 2023, the CBRT has delivered six consecutive hikes, bringing the cumulative increase to 3,150 basis points—its sharpest tightening cycle on record.

Inflation stood at a sky-high 61.4% in October, marginally down from September’s 61.5%. The Bank noted that sticky services inflation and geopolitical risks are factors that keep price pressures elevated. Accordingly, the CBRT opted to stay its course and deliver another sizable hike. That said, the Bank highlighted that recent indicators point to slowing domestic demand due to the ongoing monetary tightening cycle. Moreover, it added that inflation expectations have softened and the country’s external position has improved. Against this backdrop, the Bank sees a decline in the underlying inflationary trend.

The Bank stated that the current interest rate level is near what is required to ensure the disinflation course. Accordingly, it added that it will slow the pace of hiking and that the tightening cycle is close to its end. That said, it retained its hawkish tone with the statement that “monetary tightness will be maintained as long as needed to ensure sustained price stability”. Our panel sees rates remaining elevated in the coming quarters and does not see the Bank softening its stance until Q4 2024.

The next Monetary Policy Committee decision is scheduled for 21 December.

Muhammet Mercan, chief economist at ING, expects the CBRT to cut rates in 2024:

“Overall, given the CBRT’s guidance that the pace of tightening will slow down and the hiking cycle will be completed in a short period, we now expect that the rate increases will be completed at 45.0% with more limited increases of 250 basis points in December and January. Following the end of hikes, the policy rate will likely remain at this level until the third quarter of next year.”

Meanwhile, Fatih Akcelik, economist at JPM, sees the Bank holding rates for longer:

“We revise up our end-2023 policy rate to 42.5% (previously 40%), and maintain our end-2024 policy rate forecast (and terminal rate) at 45%. We find the MPC statement hawkish as the CBRT signals higher rates for longer. The CBRT pledged that it will maintain a tight monetary stance as long as needed to ensure sustained price stability. We interpret this as the CBRT being in no rush to cut the policy rate as inflation starts to decline in H2 2024.”

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