The monetary policy committee (MPC) of Turkey’s central bank on August 20 kept its policy rate unchanged at 50% in line with market expectations (chart).

The decisiveness shown with the tight monetary stance will bring down the underlying trend of monthly inflation through a moderation in domestic demand, a real appreciation in the Turkish lira and an improvement in inflation expectations, the authority reiterated.

The tight monetary policy will be maintained until a significant and sustained decline in the underlying trend of monthly inflation is observed and inflation expectations converge to the projected forecast inflation range, it also restated.

The next MPC meeting is scheduled for September 19. The rate-setters at this point look set to again stick with the 50% benchmark.

As things stand, a rate cut is expected in the fourth quarter.

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 the ultra-loose 8.5% that was in play in June last year.

On August 5, the TUIK said that Turkey’s consumer price index (CPI) inflation officially stood at 62% y/y versus 72% y/y in June and 75% y/y in May.

TUIK also posted monthly official inflation of 3% for July. It released a 2% month on month rate for June, after releasing 3% m/m figures for the three previous months.

Beyond July, TUIK is set to deliver further outcomes in the 1-2%s for the official monthly headline indicator.

TUIK’s inflation series reached its peak at 75% in May. It is quickly falling back to the 40%s 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, despite the impressive bendiness it finds in its sums.

On August 8, Turkey’s central bank kept its end-2024 official inflation "target" unchanged at 38% in its latest quarterly inflation report.

The upper boundary of the forecast range was also left unchanged at 42%.

The inflation report also reiterated that average "seasonally-adjusted" official monthly inflation will decline to 2.5% in 3Q and to below 1.5% in 4Q.

As things stand, the Erdogan regime is getting ready to release an official inflation figure at around 40-42% for December.

If the average unadjusted official monthly inflation releases come in at 1.40%, end-2024 inflation will come in at 38%. For 42%, an average of 1.98% is required.

On October 31, the central bank will release its next inflation report and updated forecasts.

Looking at the global markets, no further turbulence following that of August 5 is visible. Turkey’s CDS remain below the 300-level, while the yield on the Turkish government’s 10-year eurobonds is testing below the 7%-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.

Between March and July, the Erdogan administration applied its straight-line USD/TRY rate policy. It drew a line around the 32-level this time around.

With August, the 33s are seen as the new USD/TRY level.

On August 19, Bloomberg reported that government-run banks sold $500mn during the day. Turkey’s central bank uses this approach to intervene in the currency market, and it is a tradition that is kept alive by the current “orthodox” economic management appointed by Erdogan in his U-turn.

Since the local elections held on March 31, the central bank has built up its reserves thanks to portfolio inflows (mainly carry trade), declines in FX deposits at local banks and increases in FX loans.

With July, portfolio inflows sharply slowed and the central bank introduced caps on FX loan growth (due to tightening concerns).

As things stand, it can be said that the central bank’s reserve quality is no longer negative.

The possibility of insisting on keeping the USD/TRY pair flat, something that was seen prior to the appointment of the new economic management, is not visible at this point in time.