CBRT holds rates despite inflation sitting at record-high

CPI inflation may have shot through 60% YoY recently, but inflation should still fall to single digits in 2023 despite the CBRT’s ultra-loose policy stance as measured in real terms.

At least, that is what today’s rate decision was all about as the CBRT kept rates unchanged at 14.00%, in line with expectations. In the accompanying statement, the central bank cited geopolitical risks as keeping downside risks to the economic outlook prominent, referring to the war in Ukraine and its impact on global commodity prices and supply chains. A resolution of the ongoing regional conflict and recovered base effects should allow the disinflation process to start, according to the CBRT, in line with both expectations and the previous statement.

While it is certainly the case that an end to the war in Ukraine and higher base levels from last year’s inflation will tone down price pressures, a lot needs to happen for real rates to even be close to positive territory given that they now sit at -47%. Even before the war, real rates in Turkey were deep in negative territory while the lira continued to weaken to record lows as markets failed to wrap their heads around the CBRT’s “new economic model” of low interest rates.

For now, it doesn’t look like policymakers are set to reverse course, which means that as long as the war in Ukraine weighs on inflation expectations globally via commodities and supply chains, policy is set to be left unchanged.

Turkey’s government may lean more heavily on unconventional policy tools to shore up the FX rate and bolster currency reserves, however, if history is any guide, these measures only provide temporary relief to the Turkish lira.

Lira mildly weakens on CBRT day but continues to trade within weekly ranges

As today’s statement included no surprises at all, the FX impact was also fairly limited.

The lira mildly weakened in the buildup to, and the aftermath of the event, but price action remained limited when viewed in the context of this week’s range. Looking ahead, the lira will remain vulnerable to developments in Ukraine. Even if the currency depreciates excessively, measures are more likely to come from the fiscal front than the CBRT.

Authors: 

Ima Sammani, FX Market Analyst

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