A good, positive surprise from the MPC

TURKEY - In Brief 23 Nov 2023 by Murat Ucer

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The CBRT/MPC raised the policy rate by 500 bps to 40% today, above the consensus forecast, including ours, of 250 bps (see chart). The statement also provides specific forward guidance now, which reads as follows (link here): “The Committee assessed that the current level of monetary tightness is significantly close to the level required to establish the disinflation course. Accordingly, the pace of monetary tightening will slow down and the tightening cycle will be completed in a short period of time. The monetary tightness will be maintained as long as needed to ensure sustained price stability.” We read this to imply, tentatively speaking, two more 250 bps rate hikes or so, say in December and then in January, reaching, most likely, a terminal rate of around 45% before the local elections, and then perhaps staying there for a while, considerable uncertainty notwithstanding. As regards the section on inflation dynamics, the statement remains reasonably cautious. It observes that October inflation print “remains in line with the outlook presented in the most recent Inflation Report” and points to the beginnings of “limited” improvement of inflation expectations and pricing behavior (“our translation” from the Turkish version, as the English translation reads somewhat differently) but that the “existing level of domestic demand, the stickiness in services inflation, and geopolitical risks keep inflation pressures alive”. As for the external side, the generally and somewhat unexpectedly positive trend of (gross) reserves notwithstanding, we continue to find the Bank’s take on external financing conditions a bit too complacent, and its tacit strategy of engineering some ...