Monex: Turkish central bank does not set the tone for interest rate cut

June 17, 2021

The following is a short commentary in English from Ima Sammani, Currency Analyst at Monex Europe, on the Turkish central bank's interest rate decision.

The Central Bank of the Republic of Turkey was widely expected to keep rates on hold at 19% today, however, the question was whether the press statement would include language that sets the tone for a rate cut in one of the subsequent two meetings. This wasn’t the case despite the fact that President Erdogan publicly announced his preference for lower rates in either July or August, May’s CPI data saw inflation moderate, and the current account is beginning to improve.

The press statement continued to stress that real rates would remain in positive territory until the disinflationary channel is formed, which may take longer than May’s inflation data suggests given the continued rise in commodity prices, lira weakness, and the latest fuel tax hike.

By not dialing down the language around real rates and the commitment to keep a tight monetary policy stance going forward, the CBRT quashed concerns that political pressure is taking its toll again on policy making and that Committee members would use today’s announcement to set the scene for an imminent rate cut.

The level of caution taken by the CBRT today bodes well for investor sentiment, which is visible in USDTRY with the lira retracing some of today’s losses that were driven by broad-based USD strength.

Next up for the lira is June’s inflation data, released on July 5th, which should show the impacts of returning consumer demand and last month’s fuel tax hike. The data will be key in determining whether Turkey’s disinflationary channel has truly formed and comes just a week before the CBRT’s next meeting on July 14th. While the tone of today’s rate statement eased concerns over an imminent easing cycle, the door for rate cuts in Q3 remains propped open by political pressure.