WOOD Flash – Turkey macro: CBT begins easing, but restricted by limited room ahead

The MPC has, unexpectedly, cut the policy rate by 100bps, to 18%, earlier than both we and consensus had expected, but in line with the recent signal from the Governor, putting emphasis on core inflation, rather than headline. We believe that, if the easing is contained – along the lines of the cumulative 200bps we flagged recently for 2022E – then this phase should not have too much of a negative implication for the TRY and inflation expectations, beyond what we had expected to see anyway over the coming quarters. However, any attempt to be bolder would be likely to end up with a reversal of the easing by the middle of next year. The governor’s decision to focus on core, instead of headline, inflation does not change the underlying problem that inflation expectations are increasingly de-anchored and supply-side inflationary pressures are rising globally.