Turkish rate cuts expected in fourth quarter, inflation may slow - MUFG

Turkey is expected to cut interest rates from 19 percent in the fourth quarter of the year even though rate hikes are probably needed to tackle high inflation, MUFG Bank said.

Consumer price inflation may slow to 18.75 percent in August from 18.95 percent in July, Japan’s largest bank said in a research note, currency news and analysis website FXStreet reported on Tuesday.

“From an aerial perspective, under a more conventional monetary framework, the ongoing deterioration in the inflation picture would likely require policy tightening,” MUFG said. “However, given the credit-fuelled, economic growth at all costs strategy of the central bank, we continue to believe that the next rate move will be a cut, most likely in Q4 2021, possibly in November, when base effects are set to pull inflation down slightly.”

Inflation probably peaked in July, but food prices still present a risk, the bank said. Inflation is set to slow to 16.2 percent by year-end though may accelerate temporarily to 19.3 percent in September, it said.

“Our base case forecast is for a cumulative 200bp cut before year-end, likely in two 100bp steps in November and December, taking the policy rate to 17 percent. The risk is skewed towards earlier easing, particularly if inflation starts to moderate sooner than expected,” MUFG said.

The Turkish Statistical Institute is due to publish August inflation figures on Friday. The central bank will meet to decide on interest rates on Sept. 23.

The central bank has kept rates steady at 19 percent since March even as inflation picked up, at least in part due to political pressure from the government. President Recep Tayyip Erdoğan has called for rate cuts and says higher interest rates are inflationary, a view that jars with conventional economic theory.