The monetary policy committee (MPC) of Turkey’s central bank on April 25 kept its policy rate unchanged at 50% in line with market expectations (chart).

In March, despite an ongoing decline, the underlying trend of monthly inflation was higher than expected, the MPC noted.

Considering the lagged effects of the monetary tightening, the committee decided to keep the policy rate unchanged.

The tight monetary stance will be maintained until a significant and sustained decline in the underlying trend of monthly inflation is observed, the authority reiterated.

In 2H24, moderation in domestic demand, real appreciation in the Turkish lira and an improvement in inflation expectations will establish disinflation, according to MPC's statement on the reasoning behind the policy rate decision.

The MPC said it would continue to implement macroprudential policies and sterilisation tools.

Separately, the central bank announced some changes in its "macroprudential policies" regarding its objective to convert FX-protected deposits (KKM) to lira deposits.

It should be noted that the MPC is no longer talking about building up its reserves in parallel with its so-called monetary framework simplification policy.

The next MPC meeting is scheduled for May 23. The rate-setters at this point look set to stick with the 50% benchmark.

In June 2023, following the post-election appointment of Turkey’s new economic team led by finance minister 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 April 3, the Turkish Statistical Institute (TUIK, or TurkStat) said that Turkey’s consumer price index (CPI) inflation officially stood at 69% y/y in March versus 67% y/y in February and 38% y/y in June last year.

TUIK also posted March official inflation of 3% m/m versus 5% m/m in February and 7% m/m in January.

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

On February 8, the central bank kept its end-2024 official inflation "target" unchanged at 36% in its quarterly inflation report. However, it estimates a higher figure.

The authority also sees the official series peaking at 73-75% in May and average official monthly inflation declining to 1.5% in 4Q23.

On May 9, 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 five-year credit default swaps (CDS) remain above the 300-level, while the yield on the Turkish government’s 10-year eurobonds remains below the 8%-level.

Since last month, Turkey's Erdogan administration has returned to its straight-line USD/TRY rate policy. It has drawn a line around the 32-level this time around.

The Erdogan regime is still insisting on not delivering its traditional post-election lira devaluation, following the conclusion of the March 31 local polls.

As a result the northward pressure on the pair remains, the portfolio inflows are not increasing at any real speed and the window for slowly building up lira papers is not opening.

Some more and juicier controlled devaluation could provoke the desired inflows. At the moment, everyone is awaiting some further depreciation in the lira with the traditional pre-election pressure on the USD/TRY pair having dissolved.

Switching to a floating exchange rate regime would be the best course. However, such a move would fire up another inflation wave. And sharp jumps in inflation trigger panic-driven demand.

Last time when such a panic occurred in Turkey, the regime had to introduce the so-called FX-protected deposit scheme (KKM). Now it cannot get rid of it.

If the regime insists on not delivering an attractive lira devaluation, then the window for benefiting from the subsequent appreciation will remain closed.

Then eyes will focus on government lira paper price jumps with rate cuts.

Ahead of May, when official inflation will peak, the horizon for the beginning of rate cuts (currently expected in 4Q24) will be discussed.