MNI EM INTERVIEW: CBRT May Cut To Boost Growth-Ex-Gov Official

MNI (LONDON) - Growth concerns may prompt the Central Bank of the Republic of Turkey to cut rates by as early as December, a senior ex-Turkish Treasury official told MNI, adding that new official targets for both prices and growth appear unrealistic and that the fight against inflation may gradually lose priority.

Inflation should end the year close to the 41.5% cited in the recently published Medium-Term Programme for 2025-7, but above the 38% targeted by the CBRT, M. Coskun Cangoz said in an interview.

“The Bank may want to see that inflation falls beyond the base effect and wait until the first months of 2025. However, since economic growth is weak, a symbolic rate cut in December would not be surprising,” he said. “As for 2025, it will not be possible to break inflation expectations and reach the 17.5% target unless monetary policy is supported by fiscal policy and structural reforms.” (See MNI INTERVIEW: CBRT To Cut By Q1, Miss Price Target - Demiralp)

CBRT governor Fatih Karah and Finance Minister Mehmet Simsek are likely to remain in their positions throughout the medium-term programme, according to Cangoz, former chief economic counsellor to the government and now director of the Centre for Studies on Fiscal and Monetary Policy in Ankara.

“Turkey has reached a point where a U-turn may trigger a scenario of hyperinflation and a shrinking economy,” he said. “A slight contraction in growth and employment will be tolerated if there is a public opinion that the growth will bounce back with a lower inflation. However, this process may be longer than expected, and if there are unexpected changes in the political calendar, disinflation may lose its priority on the agenda.”

FISCAL POLICY

Fiscal policy has not been sufficiently restrictive to support the CBRT’s efforts this year, Cangoz said, with budget expenditures exceeding nominal projections in the MTP. 

“Since tax revenues increased more than the expenditures due to inflation, the budget deficit will decrease slightly in nominal terms. Considering that nominal GDP will also increase more than the projections, the ratio of the budget deficit to GDP will also decrease. Therefore, it is not possible to say that there was fiscal consolidation in 2024.”

Budget expenditures are set to increase by more than 30% in 2025, when Turkey’s budget deficit is projected to be 3.1% of GDP, he noted.

“In summary, the current MTP does not give a clear message that fiscal policy will support monetary policy in 2025.”

While the MTP’s forecast of GDP growth of 3.5% this year is achievable despite a possible slight decline in Q3 and Q4, targets of 4.0% in 2025, 4.5% in 2026 and 5.0% in 2027 are “generally unrealistic,” said Cangoz.

“Unfortunately, disinflation has a cost, and it does not work hand-in-hand with growth,” he said, adding that with Turkey’s economy strongly dollarised the pass-through effect of exchange rate variation will be “decisive.”

“In order for the targets in the MTP to be achievable, there shouldn't be an exchange rate shock. However, considering the level of inflation, the exchange rate should be formed in a way that will not negatively affect Turkey's competitiveness. Therefore, the continued appreciation of the [Turkish lira] will also pose a risk to the MTP targets.”

Economic growth of 4% or higher would also push up Turkey’s current account deficit without a decline in global energy and commodity prices, he said.