Turkey’s central bank held interest rates steady at 50 per cent for a fifth straight month as expected, and repeated that it remains vigilant to inflation risks even as it expects disinflation to gain pace.

The bank gave little clue about when it might begin cutting its policy rate, which analysts generally expect to happen late this year.

But in a hint of the timing of pending easing, it said it is increasingly focused on the alignment of inflation expectations and pricing with its own projections for the disinflation path.

The “alignment of inflation expectations and pricing behaviour with projections has gained relative importance for the disinflation process,” the central bank’s policy committee said.

The bank last raised rates in March, by 500 basis points, capping an aggressive tightening cycle that began more than a year ago to rein in years of soaring prices. It has since held steady while vowing to hike more if the outlook worsens.

“Indicators for the third quarter suggest that domestic demand continues to slow down with a diminishing inflationary impact,” the bank added on Tuesday.

The lira strengthened to 33.81 after the decision and stood at 33.82 at 1119 GMT. It hit a record low of 33.84 earlier on Tuesday.

Annual inflation began dipping in June and touched 61.78 per cent last month in what is expected to be a gradual, lasting decline.

Earlier this month, the central bank maintained its inflation forecasts for end-2024 and -2025 at 38 per cent and 14 per cent respectively, projecting it to fall to 9 per cent by the end of 2026. Economists predict it will reach about 42 per cent by year-end.

But underscoring the divergence in expectations, sceptical Turkish households see inflation remaining at 72 per cent in a year’s time, according to a central bank survey released in June.

TIMING EASING
The tight monetary policy stance could be maintained even with rate cuts, Central Bank Governor Fatih Karahan said recently, also highlighting the importance of inflation expectations converging with the bank’s own forecasts.

Since June last year, the central bank has raised its policy rate (TRINT=ECI) by a total 4,150 basis points, reversing years of monetary stimulus supported by President Tayyip Erdogan to boost economic growth despite soaring prices.

The policy U-turn is clamping down hard on credit and economic growth, and aims to leave behind a years-long cost-of-living crisis and a series of currency crashes.

In a Reuters poll last week, all 17 economists expected the bank to hold rates this month and to not ease until October at the earliest, with four forecasting October, four forecasting November and five forecasting early next year.

The policy rate was expected to drop by 500 basis points to 45 per cent by the end of 2024, according to the poll.

Timing the first rate cut will be crucial given it will create expectations of further cuts, BofA Securities said in a recent note.

“Especially given the track record of the past, and the costs and consequences incurred, both locals and investors will be more sensitive to early cuts in Turkey than anywhere else,” BofA said.

“The reason for the central bank to cut rates…(will be) to maintain tightness with a reasonably high real interest rate which depends on expectations of real sector and households. Hence, we expect the pace of cuts to be slow enough to make sure this tightness is preserved.”