A sharper-than-anticipated slowdown in Turkish inflation in May has reignited speculation that the country’s central bank could resume interest rate cuts as early as this month, lifting sentiment across markets.
Consumer prices rose 35.41% on an annual basis last month, down from 37.86% in April and less than half the level it reached a year earlier as tight monetary policy continued to slowly cool price expectations.
Month-over-month, inflation was 1.53%, compared to 3% the previous month, largely due to an unexpected drop in food prices, official data showed on Tuesday.
Both annual and monthly data came in below market expectations and boosted banking stocks on hopes that a return to rate cuts could drive the sector. Before Tuesday’s data, analysts had seen a first rate cut coming in as early as late summer.
The Central Bank of the Republic of Türkiye (CBRT) pivoted to raising its key policy rate by 350 basis points in April to 46% and pushed the overnight lending rate to 49% after Turkish assets and the lira fell sharply after Istanbul Mayor Ekrem Imamoğlu was jailed pending trial over graft charges.
Before that, the bank had begun an easing cycle and gradually cut its one-week repo rate to 42.5% in March as inflation fell from the level of more than 75% that it reached in May 2024.
Analysts at Dutch banking giant ING said a strong base effect and broad declines in pricing pressures have driven annual inflation downward, reinforcing an improving trend.
"This suggests that the impact of recent market volatility on inflation remains contained, thanks to timely and comprehensive action by the CBRT," they noted.
While the CBRT has signaled a cautious approach, analysts say the decline in inflation has provided some additional room for the bank to resume the rate cuts. Any shift, however, will likely be contingent on whether the overnight lending rate converges with the policy rate in the coming weeks.
The CBRT’s next monetary policy committee (MPC) meeting is scheduled for June 19, followed by another on July 24.
Following Tuesday’s data, foreign institutions are divided on the outlook.
Capital Economics suggested a cut as early as this month is “not out of the question,” while BBVA Research expects the easing cycle to resume from July. In contrast, Morgan Stanley and ING believe the CBRT will keep rates steady in the June meeting.
Analysts at Morgan Stanley still estimate a rate cut coming in July.
Currently, the central bank mainly funds lenders at the upper band. But analysts at ING said May’s inflation data, combined with stabilizing market conditions and the resumption of reserve accumulation (from $138.5 billion in early May to $153.1 billion at the latest) "may enable the CBRT to shift its funding toward one-week repo auctions, potentially leading to a lower effective funding rate that aligns with the policy rate."
Last week, the central bank kept its inflation forecast steady in its quarterly report saying upward and downward risks balance out. Governor Fatih Karahan said the bank is ready to tighten policy if inflation worsens.
The bank’s year-end mid-point estimate stands at 24%, with an upper band of 29%. Turkish officials continue to emphasize that inflation will remain within this forecast band. Market surveys see a higher rate of around 30%, though estimates have recently been revised down modestly.
After a sharp depreciation in March, the lira has stabilized in recent weeks and gained ground following the latest inflation figures. It is still 9.6% down against the dollar since the beginning of the year. It traded relatively unchanged on Wednesday at around 39.14.
