It is unanimously expected that the Central Bank of Türkiye (CBT) keep its base rate unchanged at 50.0% at today’s meeting. Even if the continued depreciation of the lira might have raised some doubts about keeping rates unchanged under other circumstances, now that the June CPI surprised on the downside, the likelihood of any further policy change has become remote, notes Tatha Ghose, FX strategist at Commerzbank.
Inflation is unlikely to fall below 40%
“We ourselves have warned in recent days that the improvement in the CPI was not convincing, while a further depreciation of the lira could follow, as it was clear that monetary policymakers had to intervene to defend the 33.0 level in recent weeks before the exchange rate was finally broken.
We expect to hear language that the CBT will keep monetary policy tight for longer as the risk of inflation still exists. This is what the governor maintained in recent comments. Of course, it is rather strange that, with Turkey’s long history of runaway inflation, right after a questionable CPI reading, the central bank even has to explain why it is not cutting rates.
The currency market is increasingly nervous that President Tayyip Erdogan may not have patience for high interest rates now that inflation seems to be moderating somewhat. In Turkey, inflation could moderate from the current 70% to 50% or 40% in this way. But beyond that it will be problematic. And today’s policy decision will not constitute a positive step towards solving this problem.
Source: Fx Street
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