Promising to stick to a tight monetary policy until inflationary pressures ease, he Monetary Policy Council of Central Bank (CBRT) kept its main policy rate at 24%, as well as promising additional tightening, if necessary. The lira gained value vs USD afterwards, but slumped subsequently, as US generals threatened Turkey with sanctions if S-400s are purchased from Russia. CBRT’s resolute stance in the face of declining core inflation (down to 18.1% YoY) and AKP’s tenuous standing in polls has received plaudits from Turkish financial intuitions, but one questions how long Erdogan can retail his patience in the midst of a deepening recession.
MPC – CBRT strives to remain cautious…
The minutes of today’s decision was almost exactly same as the one in January. There was no significant change in the Bank’s assessment of inflation and growth outlook except for subtle changes that require reading in between the lines. The Bank has slightly changed its assessment of economic activity, replacing “slowing economic activity” with “slow economic activity”. We believe, this is merely an observation that the second derivate of economic growth (e.g. decline in the rate of sequential contraction in domestic demand) turned its head up. One would still consider this as a relative improvement in balance of risks, as we observed dramatic decline in domestic demand since August.
With respect to price developments, MPC used the exact same wording on inflation “risks on price stability continue to prevail” despite back-to-back release of relatively constructive inflation reports since January MPC (January/February CPI). Despite no change in wording, by keeping the same wording, CBRT implicitly emphasizes its cautious approach its price stability mandate.
With respect to monetary policy stance, the Central Bank has kept the tightening bias of its monetary policy stance by keeping the sentence “if needed, further monetary tightening will be delivered” unchanged.
All in all, there is nothing in the statement that would lend further support to those who argue for a rate cut at the next MPC meeting on April 25th. June MPC still remains our base case for the beginning of the easing cycle, in line with our judgement that a more conservative Central Bank would wait until well into 2Q19 to judge trajectory of core inflation before starting an easing cycle. In fact, we would expect CBRT to refrain from front-loaded rate cuts, and instead adopt a more gradual easing.
Our June rate cut expectation currently stands at 100bps. We expect more substantial portion of the disinflationary cycle to begin by the end of 2Q19. However, Turkey’s long-run estimates of inflation continue to remain around 12%, more than the double the rate of official target of 5.0%. However, as disinflation process evolves in a satisfying pattern, CBRT would still have ample room for easing through the second half the year and onwards. (Yatirim Finansman Research)
Risk prevails says CBRT…
The CBRT revised the “inflation outlook” with “inflation indicators” in its sentence “developments in import prices and domestic demand conditions have led to some improvement in inflation outlook/indicators”. This signals us that the CBRT evaluates the improvement in inflation which has materialized, but the outlook is uncertain. It’s good to see the Bank keeping its emphasis that “risks on price stability prevails”.
First cut may be in April…
The CBRT seems to have opted for waiting and seeing the inflation developments throughout 1Q19 and it is good to see the CBRT following a cautious approach as a premature rate cut would backfire according to our view with its negative implications over exchange and interest rates. Though CPI inflation slid below 20% by February which is earlier than our expectations, we do not think the CBRT would be in a hurry to dramatically cut policy rates in the near future. Rather, it is likely to consider a rate cut should outlook poses a positive picture for inflationary risks. This would also eliminate the political pressure concerns and give the chance the CBRT to get ahead of the curve. Hence, we currently expect the CBRT to introduce a measured cut in its April meeting at the earliest.