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Summary of Document: Turkey - Central Bank Keeps Policy Rates on Hold

Core Content

The document provides an analysis of the recent decision by the Central Bank of the Republic of Turkey (CBRT) to keep the monetary policy rate unchanged at 17.75% following its meeting. The decision was in line with market expectations, which had anticipated a 100bp rate hike. The report outlines the rationale behind the decision, the current inflationary pressures, and the potential implications for the Turkish economy and currency.

Main Points

• Interest Rate Decision:
  The Monetary Policy Committee (MPC) decided to keep the 1-week lending rate at 17.75%, which is 150bp above the policy rate (overnight lending) and 150bp below (overnight borrowing). This decision reflects a continuation of the tight monetary policy stance.

• Inflation Drivers:
  The inflationary pressures in Turkey are primarily driven by cost-push factors, including:

  • A year-to-date (ytd) increase in the cost of funding of 23.5%.
  • A year-on-year (y/y) inflation rate of 35%.
  • The devaluation of the Turkish Lira against a basket of currencies (equal amounts of USD and EUR).
  • A significant increase in oil prices (ytd: 9.5%, y/y: 50.5%).
  • These factors have led to a rise in annual producer prices to 23.7% from 14.9% a year ago (3.4% two years ago), and consumer prices have surged to 15.4% from 10.9% a year ago (7.6% two years ago).

• Economic Slowdown:
  The MPC noted a deceleration in domestic demand, which is more visible than previously observed. This slowdown in economic activity is likely a factor in the decision to keep rates unchanged, as the committee prefers to maintain a tight monetary stance rather than implement a rate hike at this time.

• Inflation Outlook and Policy Roadmap:
  Despite monetary tightening, the gap between the cost of funding and inflation remains narrow, indicating that the current measures have not effectively contained inflation. The year-end CPI forecast is kept at 14.2%, with upside risks due to rising inflation expectations. The 12-month forward CPI is expected at 11.1%, still above the medium-term target of 5%. The inflation report to be released on 31 July will evaluate the central bank's policy stance and projections.

• Government's Role:
  The new government's economic program, expected in August, is anticipated to provide clarity and potentially boost confidence in the currency market. The success of the government's economic management is crucial for currency stability.

Key Information

• Policy Rate: 17.75% (unchanged).
• Inflation Rates:
  • CPI: 15.4% (y/y), with a year-end forecast of 14.2%.
  • Producer prices: 23.7% (y/y).
• Cost of Funding: Increased by 500bp to 17.75% from 12.75% in April.
• Inflation Expectations: Rising, with the MPC likely to maintain a tight monetary stance until there is significant improvement in inflation outlook.
• Economic Context: Domestic demand is slowing, but the central bank is prioritizing inflation control over stimulating growth.

Charts Mentioned

• Chart 1: Short-term interest rates.
• Chart 2: CPI inflation and cost of funding.

These charts provide visual data supporting the analysis of inflation trends and monetary policy adjustments.

Legal Disclaimer

• The document is non-independent research and is intended for Relevant Persons as defined by MiFID II.
• It does not constitute investment research or a prospectus.
• BNPP may have conflicts of interest and may engage in transactions inconsistent with the views expressed in the document.
• The document is confidential and may not be reproduced or distributed without prior written consent.
• It includes performance data, options, and ETF disclosures, which are subject to specific legal and regulatory constraints.
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Conclusion

The central bank's decision to keep interest rates unchanged reflects a continued focus on inflation control, despite economic slowdowns. The inflationary pressures remain high due to cost-push factors and currency devaluation, and the policy stance is expected to stay tight. The government's economic roadmap is critical for restoring confidence and stabilizing the Lira.