News & analysis

The CBRT has hiked the one-week repo rate by 250bp to 45.00%, in line with our call and market consensus. This additional tightening seemingly marks the final rate rise of this hiking cycle, with the Monetary Policy Committee noting in its statement that “the monetary tightness required to establish the disinflation course is achieved and that this level will be maintained as long as needed”.

In light of this, we think an extended hold by the CBRT is now highly likely. Price growth should cool as we move through the year, but inflation remains elevated and upside risks remain, suggesting that any shift towards rate cuts is likely a conversation that will have to wait until the second half of 2024.

With neither the rise in rates nor the announced end to hiking coming as a surprise, markets have remained unperturbed by today’s decision, leaving USDTRY trading almost exactly at pre-decision levels.

Today’s final rate hike now means that the CBRT has delivered a total of 3650bp of tightening since the presidential elections last May, which were followed by the installation of Hafize Gaye Erkan as CBRT Governor and a pivot to a more orthodox approach to monetary policy. Whilst initially this brought with it a spurt of inflation, efforts to tame price growth now appear to be bearing fruit. Granted, headline inflation was recorded at 65% YoY in December, up from 62% the month prior. Core inflation also ticked up over the same period, rising from 70% YoY to 71%. However, we think the peak for price growth is now in. Both headline and core price growth should fall in the January prints on a year-on-year basis if the current monthly run rate is maintained. Moreover, 12-month inflation expectations have continued to ease too, falling from 41% in December to 39% in January.

Indeed, with today’s statement broadly echoing these points, this is seemingly the rationale for bringing policy tightening to an end at this moment.

Admittedly, a 46% rise in the minimum wage and the potential for fiscal loosening as the March local elections draw close both pose upside risks to the inflation outlook. Given this, the MPC’s warning that they “will reassess the stance of monetary policy if notable and persistent risks to inflation outlook emerge”, appears prudent. Even so, barring a notable turnaround in the disinflation trend, we think conversations at the CBRT are now more likely to focus on how long rates need to remain at current levels, rather than the need to restart monetary tightening. Whilst forward guidance on this point is somewhat limited in today’s communications, policymakers did note that they would keep rates at this level “until there is a significant decline in the underlying trend of monthly inflation and until inflation expectations converge to the projected forecast range”. Therefore, whilst we could see a case for rate cuts beginning perhaps as early as Q3, this suggests the MPC intends to wait longer to begin easing policy. As such, we see today’s policy decision as broadly positive for the lira.

Whilst high inflation should continue weighing on the currency in the short-run, we expect that the ongoing disinflation combined with improving external growth conditions and high levels of carry will see TRY appreciate strongly towards the back end of the year, in line with our base case for the currency.


Nick Rees, FX Market Analyst


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