The Central Bank of Turkey held the key interest rate at 50% at its November meeting, for the eighth month in a row. However, investors are becoming more hopeful that a rate cut may be around the corner, as inflation expectations improve.
The Central Bank of the Republic of Turkey (CBT) left its key interest rate unchanged at 50% at its November 2024 meeting on Thursday. It is the eighth month in a row that interest rates have been held at this level, in line with analyst expectations. This rate is also the highest since 2002.
The Turkish central bank pointed out that the underlying inflation trend had been showing signs of improvement in October. Domestic demand also continued to fall in the previous quarter, dropping down to disinflationary levels.
Unprocessed food inflation stayed at higher levels in October, mainly because of supply conditions which are believed to be temporary. Services inflation also picked up in October. However, core goods inflation stayed low.
Forecasts becoming more optimistic
Inflation expectations are also more optimistic, which has led investors to believe that the central bank may consider rate cuts in the near future.
The Central Bank of Turkey said on its website: “The decisiveness regarding tight monetary stance will bring down the underlying trend of monthly inflation through moderation in domestic demand, real appreciation in Turkish lira, and improvement in inflation expectations. Increased coordination of fiscal policy will also contribute significantly to this process. Consequently, the disinflation process will gain strength.”
The central bank also highlighted that it would be maintaining this tight monetary policy position until a marked decrease in monthly inflation has been seen for several months, and inflation comes under control.
Following this, it is likely to adjust monetary policy to ensure that the disinflationary process is maintained, while also keeping inflation risks in mind.
Kyle Chapman, FX markets analyst at Ballinger Group, said in a note: “The battle is not over and policymakers are being rightly cautious about cutting too early. However, with the recent progress moving real rates into positive territory, I think there is scope for a rate cut either next month or early in 2025, depending on the data.”
CBT also expects year-on-year headline inflation to be between 21% and 26% by the end of next year, and between 12% and 17% by the end of the following year. Market participants also expect inflation to be about 26.2% by the end of 2025, further supporting optimistic inflation expectations.
Turkey continues to grapple with high inflation and interest rates
Turkey has been dealing with soaring inflation and rapidly climbing interest rates for several months now, leading the economy to quickly become overheated. This happened following the central bank aggressively slashing interest rates, supported by President Recep Tayyip Erdogan’s guidance.
At the time, Erdogan had shared his thoughts about higher interest rates leading to more inflation, and strongly supported a significantly looser monetary policy. This theory has already been slammed by economists and central banks worldwide.
Although the central bank has since reversed its stance and started increasing interest rates, the country’s economy has already taken a major hit, leading to the lira plunging too. Rent and grocery prices have also been soaring.
As of October 2024, Turkey’s inflation rate was 48.6%.
