JPMorgan Sees Turkey Cutting Rates Twice, Bringing Key Rate to 35%

JPMorgan expects Turkey's central bank to lower its policy rate by 100 basis points at its October 22 meeting and by the same amount again in December, a path that would bring the main rate down to 35% by the end of the year.

The call rests on an easing in underlying inflation even as energy costs climb. On a seasonally adjusted basis, JPMorgan estimates monthly headline inflation momentum slowed to 1.9% in September from 2.3% in August, while core momentum is seen easing to 1.6% from 2.0%. The projections come ahead of the October 5 release of official price data.

Annual inflation is expected to decline to 30.2% from 31.5% in August, even though consumer prices are forecast to rise 2.2% month-on-month. That increase is attributed largely to higher fuel costs and back-to-school repricing.

Energy prices are projected to jump 6% month-on-month in September, with firmer international oil prices lifting gasoline, diesel and other fuel costs. Food inflation, by contrast, is seen as relatively contained at 0.9% month-on-month.

JPMorgan also anticipates that Turkey will scrap the sliding-scale mechanism on gasoline and gradually withdraw tax support for diesel. It sees headline inflation ending the year at 29.5%.

Turkish interest rates remain among the highest in the world, so the expected cuts would run counter to the tightening recently resumed by several other major economies.

In recent weeks, Turkey's financial markets have also been unsettled by the liquidation of more than 130 investment funds at the centre of what the country's justice minister has described as Ponzi-like "manipulative transactions."