The monetary policy committee (MPC) of Turkey’s central bank on July 23 kept its policy rate unchanged at 50% in line with market expectations (chart).

The underlying trend of monthly inflation registered a notable decline in June, the MPC observed.

Leading indicators suggest that monthly inflation will rise temporarily in July due to adjustments in administered prices and taxes as well as supply-side factors in unprocessed food prices, which are largely beyond the control of monetary policy, it added.

However, the rise in underlying inflation is expected to be relatively limited, according to the MPC.

In addition to the high level of, and the stickiness in, services inflation, inflation expectations, geopolitical risks and food prices keep inflationary pressures alive, the authority also noted.

The next MPC meeting is scheduled for August 20. The rate-setters at this point look set to again stick with the 50% benchmark.

In June 2023, following the post-election appointment of Turkey’s new economic team led by finance minister and ex-Wall Street banker Mehmet Simsek, the Erdogan regime U-turned on monetary policy and launched a tightening process that is ongoing.

The policy rate was hiked to 50% by March this year from 8.5% in June last year.

On July 3, the Turkish Statistical Institute (TUIK, or TurkStat) said that Turkey’s consumer price index (CPI) inflation officially stood at 72% year on year in June versus 75.45% y/y in May and 38% y/y in June last year.

For June, TUIK also posted official inflation of 2% month on month after releasing 3% m/m figures for the three previous consecutive months.

The MPC’s comments in its latest rate decision suggests that monthly inflation for July will again be released in the 3%s.

Beyond July, TUIK is set to deliver further outcomes in the 2-3%s for the official monthly headline indicator.

TUIK’s inflation series reached its peak at 75.45% in May. It should quickly fall back to the 40%s in the next few months thanks to the base effect.

Pushing the headline figure to below 40% would perhaps prove too much of a stretch for the country’s infamous statistical institute.

On May 9, the central bank hiked its end-2024 official inflation "target" to 38% in its latest quarterly inflation report from the 36% stated in the February report.

The upper boundary of the end-2024 forecast range was pushed up to 42%.

The central bank also foretells that average official monthly inflation will decline to 1.5% in 4Q23.

On August 8, the central bank will release its next inflation report and updated forecasts.

Looking at the global markets, as things stand they do not suggest any notable turbulence. Turkey’s CDS remain below the 300-level, while the yield on the Turkish government’s 10-year eurobonds remain below the 8%-level.

In June, the European Central Bank (ECB) delivered a rate cut while the Federal Reserve (Fed) has been delaying the delivery of its expected rate cut.

Since March, the Erdogan administration has been applying its straight-line USD/TRY rate policy. It has been drawing a line around the 32-level this time around.

In the last few weeks, portfolio inflows and reserve accumulation have turned to positive. Thanks to the strong inflows in May, the central bank’s net FX position is in positive territory at the moment.