As inflation further eases, eyes turn toward Central Bank rate decision

ISTANBUL

With inflation further eased, all eyes are now on the Central Bank as its Monetary Policy Committee is scheduled to meet on June 19 to decide on interest rates.

Türkiye's annual inflation was at 35.41 percent in May, down from 37.86 percent in April, its lowest level since November 2021.

The monthly inflation also slowed from 3 percent to 1.5 percent.

At its April meeting, the MPC raised the policy rate (the one-week repo auction rate) from 42.5 percent to 46 percent.

It also increased the overnight lending rate from 46 percent to 49 percent and the overnight borrowing rate from 41 percent to 44.5 percent.

The better-than-expected May inflation print led to the question of whether the bank could opt for a rate cut when it meets later this month.

Analysts at the Bank of America (BofA) think the Central Bank is unlikely to implement a rate cut in June, noting that food prices showed a surprising downside, while services slowed, and core goods remained stagnant.

BofA expects a 200-basis point rate cut in July, but it said the bank will need to see the effects of foreign exchange fluctuations on core goods diminish before considering a rate cut.

They, however, argued that the Central Bank might adjust the interest rate corridor by decreasing the upper band to 47.5 percent at the June MPC meeting.

A rate cut this month is “now not out of the question,” said London-based Capital Economics, adding that the drop in inflation could prompt the bank to act sooner than expected.

“The larger-than-expected fall in Turkish inflation in May will increase the bank’s confidence that it can restart its easing cycle soon,” it said.

“While we had thought the easing cycle would resume in the third quarter, a rate cut this month is now not out of the question,” it said in a note, released after the inflation data was unveiled.

The Central Bank is likely to wait for July to resume easing the monetary stance, despite the encouraging May inflation, an economist at Morgan Stanley said.

They do not expect an outright rate cut or a cut in the overnight lending either in June, the Morgan Stanley economist added.

Once the Central Bank feels more comfortable about the level of reserves, they can again start easing the monetary stance at some point, also helped by the upcoming tourism season, said analysts at BBVA.

In a note on the GDP data, ING argued that while the market largely expects a resumption in interest rate cuts in the summer, the sharp decline in international reserves may result in a more gradual easing process.