Turkey central bank will probably cut rates in July, Nomura says

(Story was updated with comment from economist in fourth paragraph.)

Turkey’s central bank will probably reduce interest rates in July after inflation slowed and global monetary policymakers turned dovish, according to Nomura economist Inan Demir.

The central bank’s rate cut should be no more than 100 basis points because base effects will likely lead to a re-emergence of inflationary pressure from November, Demir said in an e-mailed report on Wednesday.

Turkey’s central bank hiked interest rates by 625 basis points to 24 percent last September in response to a slump in the lira’s value that threatened a full-blown financial crisis. It has kept rates steady since.

"This period coincides with a dovish turn in the monetary policy outlook for the advanced economies and improved market perceptions about Turkey’s geopolitical problems," Demir said. "We have our doubts about the latter, but the base effect-driven disinflation and easier global monetary conditions will likely pave the way for a rate cut."

The rate reduction is likely to come despite an increase in the price of some commodities set by the public sector at the start of this month, Demir said. Combined with an end to some temporary tax cuts on cars, furniture and white goods, inflation may climb by an annual 1.5 percent in July before slowing again, he said.

Turkish consumer price inflation eased to 15.7 percent in June, the lowest level in a year, from 18.7 percent in May, the Turkish Statistical Institute said earlier on Wednesday. That compared with a government estimate for CPI of 15.9 percent for the end of this year.

“Although administered price hikes are likely to drive July inflation higher, strong base effects will likely lead to sharply lower inflation over August – October,” Demir said.

Turkish Treasury and Finance Minister Berat Albayrak said last month that CPI may slow to single digits by October.

The central bank is also being helped by an apparent lull in political tensions with the United States over Turkey's purchase of S-400 missiles from Russia, which has helped the lira partially reverse recent losses.

Turkish President Recep Tayyip Erdogan said that he was told by President Donald Trump at talks in Japan last weekend that Ankara would not face economic sanctions called for by other U.S. officials and politicians. The White House has yet to confirm Trump's comments.