Guessing game: When will central bank abandon 50% interest rate policy?

The central bank’s Monetary Policy Committee (MPC) will reveal its August decision on Tuesday at 02.00 p.m., with the market anticipating no change in the current 50% policy rate. Despite this, all eyes are on the MPC statement for hints about future rate cuts, reflecting the ongoing debate over whether Türkiye is ready for such a move.

Why are all eyes on MPC meeting

The possibility of a rate cut has ignited intense discussions, especially given the tight monetary policy stance consistently emphasized in recent months. With inflation expected to reach 38% by the end of 2024, and a 2025 year-end forecast of 14%, the conditions under which a rate cut could occur are under close scrutiny. The MPC’s signals regarding these conditions will be pivotal in shaping market expectations.

Central bank’s tight monetary policy stance

The central bank has held the policy rate at 50% since 21 March 2024, following significant hikes totaling 4150 basis points. Despite maintaining a strict monetary policy stance to ensure a lasting reduction in inflation, recent discussions about a potential rate cut have gained traction. The central bank has consistently stressed that any easing would only occur when there is a sustained decline in the underlying inflation trend.

Zoom in: Fatih Karahan, the Central Bank of Republic of Türkiye (CBRT) governor, during the third inflation report of the year, reiterated the commitment to the disinflation process, maintaining inflation forecasts for the next three years. He emphasized the need to preserve a tight monetary stance.

This does not mean that rates will never come down during this process. Even in a rate-cutting cycle, we must maintain a tight stance until inflation nears our medium-term target

Fatih Karahan

Various projections about timing and interest rate

The decision to hold the policy rate steady is widely expected, but the timing and conditions for future rate cuts remain uncertain.

• Aggressive interest rate: The central bank’s inflation forecast for the end of 2024 is 38%, with a more ambitious target of 14% by the end of 2025. Market analysts view the 2025 target as highly aggressive, stressing the critical importance of the rate-cut trajectory in achieving this goal. Current market expectations for 2024 inflation are around 42%, with most analysts predicting the first rate cut by the end of this year.
• First cut: Economists are divided, with some expecting the first cut by the end of 2024, while others point to early 2025. A recent Reuters survey revealed divided opinions: four economists predicted an October rate cut, four suggested November, two forecast December and five pointed to the first quarter of 2025.

Behind the scene: While some anticipate rate cuts, the central bank’s cautious approach suggests that any easing will be carefully calibrated to avoid destabilizing the economy, especially considering the aggressive 2025 inflation target.

August meeting more important than previous ones

Banking sector insiders indicate that the August meeting could be more significant than the June and July meetings for future rate cuts.

• The central bank’s August statement might introduce new language, shedding light on the conditions for future rate cuts rather than providing a specific timeline.
• With inflation expected to decelerate post-September, the Bank’s approach to managing expectations and guiding the market will be crucial, particularly in light of its aggressive 2025 inflation target.

Economic risk: Liquidity challenges

The central bank has been actively managing liquidity, recently sterilizing excess liquidity by borrowing Turkish lira overnight at the lower end of the interest rate corridor at 47%. Currently, there is an excess of ₺211 billion in the system, and the central bank has additional tools at its disposal, including the potential issuance of “liquidity bonds,” which were last issued in 2007. These bonds could be sold with a maturity of up to 91 days to address excess liquidity, as mentioned in the central bank’s inflation report.

Bottom line: Looking for clues

The upcoming MPC decision may not deliver a rate cut, but it will be critical in setting the stage for future monetary policy moves. The market will closely analyze any new language in the statement, looking for clues about when and under what conditions the central bank might begin easing its policy.