Deutsche Bank report on Turkey: 'Inflation will rise, interest rates will fall'

German giant Deutsche Bank has published its new macro note titled "Turkey (CBRT): No interest rate change expected, but eyes on liquidity measures."

INFLATION TO RISE IN JULY AND AUGUST

In the report published under the signatures of Economist Yiğit Onay and Strategist Christian Wietoska, it is projected that monthly inflation will rise in July and August due to administered price hikes, automatic tax increases on fuel, alcohol, and tobacco, and wage increases for public employees and retirees.

'TURKEY HAS ENTERED A DISINFLATION PROCESS'

Deutsche Bank expects the Central Bank of the Republic of Turkey (CBRT) to keep the policy rate steady at 50 percent at its July Monetary Policy Committee (MPC) meeting. Although the Turkish economy entered a disinflation cycle in June with a better-than-expected inflation figure, it is noted that the necessary conditions for loosening monetary policy have not yet been met.

On the contrary, it is stated that the CBRT may take additional tightening measures, such as liquidity sterilization tools and increasing remuneration rates on required reserves to prevent preemptive loosening in monetary conditions.

250 BASIS POINT INTEREST RATE CUT IN NOVEMBER AND DECEMBER

According to Deutsche Bank's base scenario, the CBRT will maintain its current policy until November and will lower the policy rate to 45 percent by implementing a total of 500 basis points of interest rate cuts in the last two months of the year.

Factors behind this decision include the continued easing in the underlying trend of inflation, the anchoring of inflation expectations, the slowdown in domestic demand, and a significant unwinding in KKM (FX-protected deposit) accounts.

INTEREST RATES TO FALL TO 25 PERCENT BY THE END OF 2025

The report predicts that the CBRT will continue a gradual but permanent easing cycle until the end of 2025, with the policy rate falling to the 25 percent level.

CAUTIOUS STANCE AND LIQUIDITY MEASURES

The report states that the CBRT will maintain its cautious stance and may take additional liquidity-tightening measures to permanently sterilize excess TL liquidity. Adjusting reserve requirement ratios is at the top of the list of these measures. Pointing out that the CBRT creates excess TL liquidity in the market through foreign exchange purchases, Deutsche Bank emphasizes that this excess liquidity needs to be withdrawn more permanently.

MONETARY POLICY TRANSMISSION MECHANISM

Deutsche Bank states that the CBRT may take various steps to strengthen the effectiveness of its monetary policy transmission mechanism.

Reversing foreign exchange swap transactions with local banks, lowering foreign exchange swap limits via the quotation method, and making open market operations the primary funding channel are listed as some of the efforts in this direction.

However, it is stated that some challenges may be experienced due to the slowdown in credit growth, pressures on the profitability of the banking sector, and quantitative limits on foreign exchange derivative transactions of local banks with offshore counterparties.

News Source: 12punto