The Central Bank of Turkey responded to inflationary pressures with a strong and unexpected rate hike in March, a large set of macro-prudential measures and liquidity tightening. These moves will likely further ease concerns about the bank's priority to bring down inflation, contribute to supporting both local and foreign investors' confidence in TRY assets and help anchor inflation expectations.
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The CBT seems confident that the tight monetary stance will lead to a decline in the underlying trend of monthly inflation by moderating domestic demand; real appreciation in the Turkish lira, and improved inflation expectations. Accordingly, it expects that "disinflation will be established in the second half of 2024".
The CBT's macro prudential moves are expected to lead to a sharp slowdown in credit growth. This could also create problems for the real economy. Given this backdrop, once it achieves market stability and control over inflation expectations, the CBT will also decide the timing to unwind credit restrictions, likely by synchronising with rate cuts.
Inflation was lower than the consensus in March, but despite some improvement in the underlying trend, the data showed continuing pricing pressures in non-food groups and confirmed challenges to the disinflation process.
Continuing strength in retail, including furniture, sales
Retail sales, along with surging consumption goods imports in February, suggest continuing strength in domestic demand conditions and a need for the tightening of financial conditions. The CBT moves in response are impactful on this front. Among subgroups, non-food and food sales increased by 2.9% MoM and 2.6% MoM, respectively, while automotive fuel sales recorded a relatively mild increase of 1.1% MoM. The highest annual increase in non-food sales was observed in electrical household appliances and furniture.
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