Turkish central bank likely to lower rates in 2016

Turkey’s domestic demand, at present, is robust as the government has executed pro-growth policies in the first quarter that includes a rise of 30% in minimum wage. The economy is also being considerably aided by lower prices of energy and food. Meanwhile, fixed investment is expected to be impacted from heightened uncertainty regarding the future policy regime.

In recent months, sentiment indicators started to drop as cracks in the government started to appear. The new cabinet is expected to announce other fiscal policy that is pro-growth and plans for infrastructure spending. Moreover, it is expected to press the central bank to lower rates. Overall, the Turkish government will concentrate on stimulating employment and growth.

In the recent years, the Turkish government has put curbing inflation as a secondary aim. The new government is expected to further de-emphasize it, said Commerzbank in a research report. However, the cycle of global inflation is benign. Also, depreciation of lira has been the main driver of Turkish inflation.  Lira is likely to decline by about 10% by the end of 2016.

Supportive commodity prices and slower economic growth are likely to balance the impact of lira’s depreciation. Turkey’s average CPI inflation is likely to be around 7.5% in 2016 and 2017, added Commerzbank. Moreover, core inflation is expected to slightly slowdown in the coming quarter. However, it is unlikely to drop beyond 8.5%. Meanwhile, the Turkish central bank is likely to take a growth supportive stance. There is a possibility of a rise in political pressure to cut the policy rate.

“We think that this new rate could be set as low as 6%-6.5%, if headline CPI inflation falls to this range around the time of change”, noted Commerzbank.