WOOD Flash – Turkey macro: CBRT keeps policy rate on hold at 14.00%

The Monetary Policy Committee at the CBRT has decided to keep the policy rate on hold, at 14.00%, as we expected. The tone of the statement remained muted, in favour of no change in the policy setting. However, the tone on the inflation outlook was less assertive than before, suggesting an upwards revision in the upcoming inflation report, in our view. Inflation will continue to rise in the coming months and a corrective action would require a real slowdown in economic expansion. This is not the case now, as the economic sentiment breakdown shows us that, even though industrial confidence is falling, there are meaningful gains in services, and relatively stable data in construction and retail trade confidence. Looking ahead, we expect the policy rate to remain on hold for the foreseeable future. We see two main risks for this forecast. First, a deterioration of the relatively prudent fiscal policy, in an environment with limited available reserves. Second, a significant slowdown in the Eurozone (or a geopolitics-driven recession) could harm the growth outlook in Turkey, a compulsory component for reducing the macro risks in the coming quarters. While we expect the policy rate to remain unchanged in the foreseeable future, we see no strong evidence that inflation will slow down visibly and we see serious challenges in tapping foreign capital for a protracted period of time. The central government’s cash buffers are higher than usual, but this will offer slim protection, should global growth stall in the coming year.