The Turkish lira practically shrugged its shoulders at today’s rate decision by the central bank to leave policy unchanged, as this was widely expected by markets.
Meanwhile, the accompanying press statement did little to provide market participants with new information. Ahead of the meeting, Turkish inflation had accelerated for a seventh consecutive month in April as a weak lira and rising global energy prices sent prices higher, but the new CBRT Governor Sahap Kavcioglu predicted that rate would drop to 12.2% by the end of 2021, which is markedly optimistic considering market expectations. With inflation being where it is right now, it was more so important for the CBRT to continue to reinforce a relatively hawkish message to markets, and that is exactly what it did, but talk is cheap and the CBRT may be called into action if inflationary momentum continues.
The CBRT decided to maintain the line in the statement that said the central bank would keep nominal interest rates above inflation, however this offers some room for the CBRT to lower interest rates in the near future given that real rates are currently positive.
The question going forward is whether Turkish inflation reached its peak in April already, aligning with the CBRT’s forecasts for a cyclical peak around 17-17.5%, or whether the peak will only come later on in Q2. The CBRT’s rather optimistic outlook for inflation may mean the central bank is hurrying to get to its cutting cycle as keeping interest rates elevated is politically sensitive. This ultimately depends on May’s inflation print, as this would help the CBRT gauge whether April’s reading was the cyclical peak or not. For this reason, we expect the next CBRT meeting on June 17 to be of more importance to currency markets than today’s meeting.
Turkish lira unmoved by CBRT as markets were given no new information to digest
Author: Ima Sammani, FX Market Analyst