Bank of America (BofA) economists maintained their outlook that the Central Bank of the Republic of Turkey (CBRT) is unlikely to implement a rate cut in June, citing recent economic data. Food prices showed a surprising downside, while services slowed and core goods remained stagnant, according to the analysts.
BofA continues to expect a 200 basis point rate cut in July, contingent on certain economic conditions. The analysts believe that the CBRT will need to see the effects of foreign exchange fluctuations on core goods diminish before considering a rate cut.
They also noted that the central bank might adjust the interest rate corridor by decreasing the upper band to 47.5% during the June Monetary Policy Committee meeting.
The Turkish central bank has maintained tight liquidity, with the Turkish Lira Reference Rate (TLRef) nearing the upper band. Analysts suggest that easing liquidity could have a significant impact, even without a policy rate cut. Meanwhile, Turkey’s net reserves, excluding swaps, have increased by $15 billion since a sharp decline in March, although they remain volatile on a daily basis.
As Turkey enters the summer months, BofA anticipates a shift from a current account deficit to a surplus, alleviating concerns over foreign exchange inflows. Despite ongoing political uncertainty, the risk premium remains high, according to the analysts. They also highlighted that administrative price changes in July could influence the CBRT’s ability to implement rate cuts.
BofA revised its year-end inflation forecast for Turkey to 27.7%, down from a previous estimate of 28.1%, with risks considered balanced. The analysts emphasized the importance of monitoring backward indexation and tax increases, which could affect the central bank’s decision-making process.
