WOOD Flash – Türkiye macro: giving credit where credit is due, but keep realistic lags in mind

The Monetary Council kept the policy rate on hold, at 50%, at the June meeting and maintained a hawkish rhetoric, which signals, to us, that interest rates will remain on hold for a protracted period of time, probably 12 months (and potentially longer). The economic data reveal that an orderly slowdown of domestic demand is unfolding; whilst, at the same time, tourism and exports are buoyant. These two forces offset each other partially, and suggest that the economy is likely to expand by 4%+ in real terms this year. On the inflation front, we believe that the evidence continues to build in favour of a fairly long-lasting and increasingly coherent orthodox mix, which would deliver, in the medium term, lower inflation, at or below 30% yoy. However, this goal remains quite uncertain for the next 12-18 months, for the following reasons: inflation surveys reveal little improvement; the degree of economic deceleration is still too small; and global commodities, like food and energy inflation, could easily surprise to the upside again, due to climate events, or an eventual reacceleration of growth, thanks to lower interest rates by the ECB or other major Central Banks.