All eyes on Central Bank after inflation continues to decline

ANKARA

Investors and analysts will carefully listen to what the Central Bank has to say about inflation dynamics and the course of its monetary policy going forward when Governor Fatih Karahan unveils the bank’s quarterly Inflation Report on Aug. 8.

The report will include the bank’s inflation forecasts for this year and next.

In its May report, the bank lifted its inflation forecast from a previous 36 percent to 38 percent for the end of 2024, while keeping its inflation forecast for 2025 unchanged at 14 percent.

Karahan will take the stage at a press conference in Ankara three days after the data showed the annual inflation rate cooled to a nine-month low of 61.78 percent in July. He will receive questions from the media.

“The economic program is yielding results…The decline in inflation will be felt more in the coming period,” Finance Minister Mehmet Şimşek wrote on Aug. 5 after the official data came out.

In an interview with a private broadcaster on Aug. 6, Şimşek said that the current course of inflation is in line with their projections.

“We believe that we will close the year with an inflation rate of around 40 percent,” he said.

The decline in annual inflation will continue in August, Şimşek added.

Most international banks think disinflation will continue in the remainder of the year.

“We currently see end-2024 inflation around 43 percent year-on-year,” UBS said in a report published on Aug. 5, adding that the expected visible disinflation remains on track.

UBS expects inflation to ease to 50 percent in August, “given the impact of large base effects from last year.”

“In our view, [the Central Bank] is likely to keep its policy rate unchanged at 50 percent in the rest of the third quarter, given the very rapid build-up of FX reserves and the broad stability of the Turkish Liras exchange,” said UBS analysts.

U.S. investment bank Morgan Stanley agreed that the bank’s tight stance will continue.

“The Inflation Report and the press conference…will likely underline the bank’s commitment to disinflation, especially in view of next year's target forecast path,” it said in a report this week.

Relatively stable FX since end-March and the ongoing slowdown in domestic demand should support a decline in the underlying inflation trend beyond July and August, the report added.

But risks related to relative price adjustments, backward-looking and time-dependent pricing behavior in services subgroups, as well as elevated inflation expectations, do not leave much room for easing, in our view, it said.

“While we see room to cut in December, we believe that the Central Bank will be cautious, and timing of cuts will depend on data,” argued Bank of America.

The challenge will be to maintain tightness while cutting the rates to make sure disinflation continues through 2025, it added.