WOOD Flash – Turkey macro: CBT – bulk of policy easing pushed into 2022E

The Monetary Policy Committee at the CBT decided to keep the policy rate unchanged, at 19%, yesterday (14 July), in line with both our expectations and the consensus. The post-meeting statement retained the same cautious tone as before, and pledged to maintain a tight policy stance, unless inflation starts declining, as envisaged in the April forecasts. Moreover, the commitment to maintaining a positive real policy rate was also reiterated, until there is a permanent fall in inflation and the medium-term 5% target is achieved. Additionally, upside risks for the inflation outlook were also noted and administered prices were added to the list of factors that pose a risk to pricing behaviour, such as the rise in imports and administered prices, demand conditions, supply bottlenecks, high inflation expectations, and the possible volatility due to the re-opening effect during the summer. We see substantial upside pressure on inflation in the coming months, likely to push inflation above 19% by September, after which favourable downward base effects should kick in. Although the CBT has pledged to keep real policy rates in positive territory, the temporary drop below zero should not, most likely, result in a hawkish response from the MPC. This implies significantly reduced scope for policy easing this year; however, some deceleration in inflation in 4Q should create limited room (100-150bps) for a rate reduction, which the MPC would be likely to utilise, in our view.