MNI INTERVIEW: CBRT On Track To Hit Target- Ex-Deputy Governor

Turkish monetary policy is tight enough to ensure inflation returns to its new target by year-end, with only a minor contribution from recently-announced government spending cuts, making a rate cut possible within that time frame, former senior central bank official Fatih Ozatay told MNI

Inflation of 40-42% is achievable and would be in line with the central bank’s confidence band, said Ozatay, deputy governor from 2001-6, speaking after the Central Bank of Turkey revised its 2024 inflation target up 2% to 38% last week.

Ozatay expects no change following next Thursday's meeting after the CBRT surprised markets in March by raising the policy rate by 500bp to its current 50%. Recent policy moves and communication also improved the central bank’s credibility in the eyes of investors, he said, though domestic inflation expectations remain stubbornly divergent from official estimates. (See MNI CBRT WATCH: Turkey CenBank Holds After "Significant" Hike)

“They are not going to change it, given that the deposit rate is okay, and the credit rate may even be a little bit high. Nor at this point is the problem so much to do with confidence in the central bank currently. Rather, the confidence problem is related to the whole [inflation reduction] package.”

FED RATES REPRICING

Recent repricing of Federal Reserve rate cuts could prompt the CBRT to keep rates higher for longer, though the timing of cuts will to a great extent depend on whether policymakers believe they will meet their end-2025 inflation target of 15%, Ozatay said in an interview, in which he expressed a slightly more sanguine view of the inflation outlook than some other analysts. (See MNI INTERVIEW: CBRT Inflation Target May Go To 45% - Demiralp)

“Then they need to convince the public, foreign investors, domestic investors, etc. It’s too early now, and we would not expect it now. But if things go as the central bank thinks they will, can we talk of rate cuts at the end of this year? Possibly.”

Turkey’s year-end budget deficit could be much higher than the 6.4% of GDP planned by the government, possibly hitting 8.3% in the absence of further countermeasures, Ozatay said. Analysis by The Economic and Policy Research Foundation of Turkey (TEPAV), suggests spending cuts announced by finance minister Mehmet Simsek this week can only decrease the budget-deficit-to-GDP ratio by approximately 0.5% of GDP”

Such efforts are a small step in the right direction, Ozatay said, and signal a general intent to reduce spending. But they indicate little fiscal room for manoeuvre, with measures to raise state income lacking.

“We haven't heard - either for political or legal reasons - anything regarding public-private partnerships, which have placed an additional burden on the budget,” he said. “It is worth remembering that a similar package was announced in June 2021, which one might also regard as reducing its credibility. It's very difficult to see how they can reduce the deficit by 2.5% of GDP.”

LIRA KEY

The lira exchange rate remains the principal determinant of inflation, Ozatay said, adding that the currency’s stability in nominal terms since March’s local elections has lent weight to the CBRT’s strategy.

“The programme has been running for around 11 months now without interruption, so it does have some credibility, which might serve as an invitation to foreign capital. This could be a signal for foreigners, given the high policy rate, that it’s an opportunity for them. The central bank increased its reserves not by temporary swaps but by purchasing foreign currency.”

Nor does Turkey have to curb demand to such an extent that it harms growth, with the government targeting a below-potential GDP increase of 4% this year, Ozatay said.

“In the current situation - and in the absence of a surge in oil prices - it’s clear the rate of depreciation of the Turkish lira will remain below inflation rates, and, as the central bank has said, there will be real appreciation. So even if the growth rate is 4% you can still achieve inflation of 40-42%.”