Citigroup: The Likelihood of a Central Bank Rate Cut Strengthened in December

The Central Bank of the Republic of Turkey (CBRT) decided to keep the policy rate unchanged at 50% during its Monetary Policy Committee (MPC) meeting in November. This decision has been maintained without changes for the eighth consecutive month. However, the MPC statement and economic indicators suggest that the bank may soon enter a rate-cutting process. The slowdown in domestic demand and improvements in service inflation have been interpreted as conditions generally favorable for interest rate cuts.

Economic indicators are paving the way for rate cuts. Data showing a contraction in demand and a decline in inflation have strengthened expectations that the CBRT is preparing for rate cuts. Despite the high level of unprocessed food inflation being tied to temporary supply conditions, a symbolic rate cut is expected in December, while it has been stated that the CBRT will continue to play an effective role in keeping inflation under control.

Citigroup assessment: “Rate cut a strong possibility” Citigroup (C) economists İlker Domaç and Gültekin Işıklar noted in their reports regarding the CBRT's rate decision that the possibility of a rate cut in December is strongly on the agenda. The economists emphasized that the recent MPC statement and economic indicators indicate an increased coordination in monetary policies and emerging conditions favorable for a rate cut.

Possible rate cut forecasts until April There is also an expectation that the CBRT could implement a rate cut of 750-800 basis points by April, depending on economic indicators and the monetary policy strategy. However, it is also being discussed that a tight monetary policy stance will be maintained until there is a noticeable improvement in inflation. Some commentators predict that based on the 38% CPI inflation forecast for March, the CBRT could sustain its current tightness with interest rates of 400-500 basis points.

When considering that a lower ex-post real interest rate could also provide sufficient tightness, the amount of the rate cut has a high likelihood of reaching 1,000 basis points by April. In this process, the CBRT’s goal will be to support the economy with policies aimed at controlling inflation.