Slowing inflation fuels expectations of interest rate cut
ISTANBUL
The seasonally adjusted Consumer Price Index (CPI) indicators — closely monitored by the Central Bank to assess core trends — pointed to a moderate rise in June, analysts have said, adding that the continued slowdown in inflation supports growing expectations of a potential interest rate cut.
Türkiye's annual inflation was at 35.05 percent in June, down from 35.41 percent in May, figures from the Turkish Statistical Institute (TÜİK) showed on July 3. This marked the lowest increase in consumer prices since December 2021.
Barring any unexpected shocks in exchange rates, wages, administered prices, or commodity prices over the remainder of the year, inflation could decline to around 30 percent by the end of 2025, said Haluk Bürümcekçi, an economist.
The Central Bank’s returning to the message that “monetary policy will be used effectively in the event of a significant and persistent deterioration in inflation” signals that the policy stance has shifted from tightening to neutral, he noted.
The latest Market Participants Survey revealed that the financial sector anticipates a total interest rate cut of 10 percentage points by the end of the year, including a 300-basis-point reduction at both the July and September meetings, Bürümcekçi added.
“Accordingly, participants expect the policy rate to end 2025 at 36 percent,” he said.
Macro conditions are conducive to the Central Bank resuming policy rate cuts, JP Morgan said in a report released after the June inflation data.
Inflation momentum and expectations are falling amid slowing growth, which is likely to see CBRT rate cuts resume in July and support duration, it said.
“Disinflationary backdrop reflects relatively low FX pass-through from the USD/TRY move higher in March, and a large negative output gap as domestic demand has moderated. These trends can persist and support rate cuts,” it argued.
Finance Minister Mehmet Şimşek’s economic program is delivering results, remarked Timothy Ash, senior emerging markets strategist at Bluebay Asset Management.
Pointing to signs that the Central Bank’s recent rate hikes are beginning to curb economic activity, Ash stated: “The fact that inflation in Türkiye is running slower than expected supports expectations for rate cuts. Inflation will likely continue to surprise on the downside.”
The bank’s Monetary Policy Committee (MPC) will meet on July 24.
In June, the bank kept the policy rate, the one-week repo auction rate, unchanged at 46 percent.
The bank increased the policy rate from 42.5 percent to the current 46 percent in April.
After this month, the bank will hold three more MPC meetings in the remainder of the year, on Sept. 11, Oct. 23 and Dec. 11.
