The shift of Turkey to a looser bias most likely indicates that a first-rate decrease is about to happen soon since the policy rate minus realized inflation will turn positive.
The annual inflation rate of Turkey is expected to have fallen below the benchmark interest rate set by the central bank, which is 50% in September. It would mark the first time in three years that official borrowing costs are higher than zero when considering the price changes.
Data due Thursday will show consumer inflation dropped from 52% in August to 48.3% last month, according to the median anticipation of experts surveyed by Bloomberg. According to a different survey, monthly inflation, the central bank’s preferred metric, reached 2.2% from 2.5% in August.
Achieving a positive real rate would be a significant milestone in restoring policies made by officials tasked with overseeing the economy of Turkey during the previous year. By lowering the returns on cash, inflation-adjusted borrowing costs below zero encouraged investment and spending and trapped Turkey into an endless cycle of price increases and currency depreciation that devastated its economy.
For the past six months, the Monetary Policy Committee has maintained its benchmark, but in September, it relaxed its position. The shift of Turkey to a looser bias most likely indicates that a first-rate decrease is about to happen soon since the policy rate minus realized inflation will turn positive.
According to analyst Zumrut Imamoglu of Bank of America Corp., policymakers may start reducing borrowing prices in December; however, some international banks, such as Goldman Sachs Group Inc., anticipate this to happen a month earlier.
However, how the central bank will proceed with rate cuts remains unclear.
The MPC brought up the high services inflation that results from higher education costs and an increase in school bus prices in the recent minutes of its meeting, which took place in September.
Imamoglu predicts that the monthly reading will not be where the central bank wants it to be since the inflation of services has not yet slowed down. She stated in a research report that there are risks to the year-end inflation target made by policymakers of 38% due to the sticky services inflation and high food costs.
The economist Selva Bahar Baziki states that when price gains fall below the policy rate of 50%, the central bank is under more pressure to begin easing at the October policy meeting. It is anticipated that criteria concerning inflation expectations and momentum will provide policymakers with the necessary protection to allow them to wait until November before initiating a reduction.
The monthly inflation trajectory has also become more significant for investors, who are beginning to expect that the central bank will start reducing interest rates in the upcoming fourth quarter. Istanbul, the largest city in Turkey, saw a 3.9% monthly price gain in September, up from 1.7% in August.
Expectations for household and company prices are another crucial metric for policymakers. It has stayed significantly higher than the central bank had predicted since it views it as a risk of disinflation.
HSBC Holdings Plc analysts predicted that the central bank may postpone easing until next year, citing how crucial the protracted period of strict monetary policy is to stabilize inflation expectations. Governor Fatih Karahan will deliver the final quarterly inflation report of the year on November 8.
Turkey has consistently had some of the lowest real rates in the world for many years. September marked the third anniversary of a surprise rate drop delivered under pressure from President Recep Tayyip Erdogan, which caused severe market instability during that time and triggered a cost-of-living crisis.
With inflation expected to reach 28% and the benchmark at 30% by the end of 2025, HSBC’s analysts predicted that the real policy rate would remain strongly positive.