Waiting in high interest rates: What is the CBRT expecting?

Interest Rates Steady, Messages Balanced

The Central Bank of the Republic of Turkey (CBRT) kept its policy rate steady at 37% in its September meeting, as expected. Overnight lending and borrowing rates were also maintained at 40% and 35.5%, respectively. The decision itself was not a surprise; the market's focus was now on the question of "when will interest rates be cut" and the signals the bank would provide.

It was notable that the paragraph regarding the monetary policy stance in the post-meeting statement remained unchanged compared to the previous meeting. While the text did not contain a clear signal for a rate cut, the emphasis on the improvement in the underlying trend of inflation and the weakness in demand stood out. This balance shows that the CBRT supports the disinflation process but avoids an early commitment while external risks persist.

Energy Prices Increase Pressure

The most important factor behind the CBRT's cautious stance is external conditions. The rising geopolitical tension in the Middle East in recent weeks has directly affected energy markets. The price of Brent crude oil has risen to over 100 dollars/barrel, an increase of approximately 25% since the beginning of August. For an economy dependent on energy imports, this means that the risk of imported inflation is rising rapidly.

According to August data, annual inflation in Turkey is at 31.51%. The price increase in the housing and public services category is approaching 40%. The reflection of the rise in oil prices on these items could disrupt the fragile disinflation path. The CBRT statement also clearly expressed that "high energy prices" caused by geopolitical developments "pose an upside risk to the inflation outlook." This assessment shows that the conditions required for an interest rate cut have not yet matured.

The Shadow of the FED and Global Risk Appetite

The other leg of external pressure is in the US. The August CPI data to be announced before the FED's September 16 meeting is the most critical agenda item for global markets. Market expectations are for annual headline inflation to remain steady at 3.4% and for core inflation to decline to 2.4%.

However, risks are to the upside. In addition to the rise in oil prices, the high level of input costs in the manufacturing and service sectors shows that threats to the inflation outlook have not completely disappeared. While there are members within the FED who argue that interest rate hikes are necessary, some officials such as Waller (Federal Reserve Governor Christopher J. Waller) had indicated that interest rates could be kept steady if the improvement in inflation continues.

A CPI below expectations could support risk appetite by significantly reducing the probability of an interest rate hike. In the opposite scenario, an upside surprise, especially in core inflation, would strengthen expectations that the FED will tighten again, suppressing global risk appetite. For Turkey, this means an increase in the pressure of depreciation on the TL and a strengthening of the CBRT's obligation to maintain high interest rates.

The Door to a Cut Is Not Fully Closed

Although the CBRT is cautious in its current stance, it has not completely closed the door to a cut. The emphasis in the text on the "improvement in the underlying trend of inflation" and "weakness in demand" paints a more optimistic picture compared to the previous meeting. This keeps the expectation alive in the markets that there is limited room for a cut.

ING predicts that the CBRT could make two 100-basis-point cuts in the last quarter of the year and that the policy rate could fall to 35% by the end of the year. Expert opinions compiled by Anadolu Agency also point to a similar path: if there is an improvement in global energy prices, the CBRT may have limited room for a cut of up to 200 basis points.

In summary, the key to an interest rate cut depends on two conditions: the easing of the energy shock originating from the Middle East and the FED clearly ending its tightening cycle. Until these two conditions become clear, the rational choice for the CBRT is to create a buffer with high interest rates and wait for a clearer window.