MNI INTERVIEW: CBRT Dec Cut Possible, Real Rates Key-Demiralp
MNI (LONDON) - The Central Bank of the Republic of Turkey is “clearly signalling” rate cuts, possibly in December, but with inflation expectations high, accommodative fiscal policy and only mild recession, the justification for doing so is tenuous, a leading Turkish economist told MNI.
Contrary to a recent CBRT blog post highlighting an output gap of -0.2%, suggesting demand is coming under control as a result of monetary tightening, it is not, Selva Demiralp said in an interview. (See MNI EM POLICY: CBRT Likely To Cut In December As Past Hikes Bite)
Where once the leadership team under Governor Fatih Karahan was praised for "crystal clear" communication regarding the monthly path for inflation and under what conditions the CBRT would be prepared to ease, official comments made around the publication of November's Inflation Report were a “really a bad test case for central bank communication,” said Demiralp, economics professor at Koc University and Director of the Koc University-TUSIAD Economic Research Forum.
“Having previously said that he would only consider cutting when seasonally-adjusted monthly inflation is close to 1.5%, Governor Karahan dropped that guidance and said that the earliest we might see inflation at around 1.5% is the last quarter next year," she explained.
"What he did not say is that he will wait that long before cutting rates. Instead he referred to the fact that even if rates are cut they will still be in restrictive territory.”
The CBRT is clearly signalling easing, Demiralp said, with a first cut more likely in December than January if expected adjustments to administered energy and natural gas prices are seen pushing up inflation in the first month of 2025.
Whether the first cut is 2.5% or 1.5% will not make much difference to the private sector when loan rates are around 50-60%, she added, but two “symbolic” cuts, totalling 5%, at either end of Q1 might reduce government pressure - while delivering a hit to the central bank's credibility. (See MNI EM INTERVIEW: CBRT To Cut 2-3 Times By Feb-Cangoz)
“If your aim is to bring inflation back to 21% by the end of next year - which I don’t think is feasible - then rate cuts are only going to make it more difficult. Our forecast is for inflation to end the year at 30% with rates at their current level.
“The question then is whether the central bank wants, or is prepared, to maintain the same real rate of interest, which is currently around 3%, as inflation falls. Would doing so be sufficient to bring us to 30% inflation? It’s kind of learning-by-doing, but it may be feasible.”
INFLATION EXPECTATIONS
In a blog post published on Wednesday, the CBRT said improvements in household inflation expectations “will support the disinflation process not only through the demand side but also through the supply side.”
Household inflation expectations have never been a central bank priority, Demiralp said, rather it likely focuses on private sector inflation expectations.
“I think it's a mistake, because household decisions are what is keeping aggregate demand strong. But even if 12-month forward household expectations do decline by a few digits, that is hardly a strong signal to start cutting rates.”
Fighting price pressures under a relatively loose fiscal regime, at a time when the costs of high inflation are increasingly apparent to all but society’s wealthiest, has left the CBRT in a “lonely” position, Demiralp said.
HIGH-INCOME DEMAND
The Bank’s inability to taper the demand of less interest-rate sensitive high-income groups means its only option is “to kill the economy, which it is, not surprisingly, extremely reluctant to do.
In that sense, it’s not a bad thing that the Bank is considering cutting rates, because you cannot afford multiple businesses - especially small- to medium-sized firms - going bankrupt. Then it will only be harder to have to restart the economy.”
There would be little point in cutting rates and at the same time using macroprudential tools to tighten further, Demiralp said, since such tools cannot be fine-tuned to address particular, higher-income groups.
“The only explanation in this case would be to address political pressures. To say, ‘Yes, we cut rates, but at the same time we are keeping quantitative measures in place so that there is not going to be an increase in aggregate demand.’”