MNI INTERVIEW: CBRT Inflation Target May Go To 45% - Demiralp

The Central Bank of Turkey may be targeting an annual inflation rate of 45% and 2% growth, a leading Turkish academic told MNI, but she added that whether it can do so remains in doubt with a recently-announced package of fiscal spend cuts unlikely to eat significantly into the pace of price growth and household inflation expectations sky high.

The CBRT held its policy rate at 50% in April, despite inflation increasing 0.9 percentage point from March to 69.8%, and used the publication last week of its Inflation Report to announce it had revised its year-end inflation target up 2 percentage points to 38%.

One indication of the problems the CBRT faces are the results of a new monthly household inflation expectations survey produced by Selva Demiralp and colleagues from Istanbul’s Koc University.

These showed average year-end inflation expectations of 96% - an increase of more than 20 points compared with January’s pilot project results - despite rate hikes totalling 1,000 basis points since December 2023.

By comparison, the CBRT report included a survey coordinated with the Turkish Statistical Institute which put 12-month inflation expectations at around 80% by April 2025. “So our year-end average expectation of 96% is consistent with that, given that three months down the road you might actually have a perception that inflation is going down to 80%,” Demiralp said in an interview.

GROWTH FORECAST BOOSTED

The Report also revealed the Central Bank has increased its 2024 growth forecast from 1.5% to around 2%, a figure which, while substantially below the government’s 4% target, may make reaching 38% inflation impossible.

“Based on our own reverse-engineering of the output gap graph, the implied growth rate consistent with 36% inflation was around 1.5%. Since then, they’ve revised the inflation target up by two percentage points, but the implied growth rate is now 2.1%,” Demiralp said. “On the face of it they are saying that a hard landing is even possible. But a 2% growth rate, if that's what they have in mind, I wouldn't consider a hard landing.”

The CBRT’s Monetary Policy Committee will likely stand pat again next week, Demiralp said, with inflation expected to decline by around 10 percentage points in each of July and August. “At that point, lowering inflation by an additional 10 points may not be too hard if they stick to what they started,” she said. (See MNI BRIEF: Global Rates Divergence To Slow EM Easing - CBRT)

SWITCH TO EASIER STANCE LIKELY

Demiralp was “not sure” if an inflation rate of 45% is what the CRBT is ultimately aiming at, but said she “wouldn't be surprised if they switch to an easier stance and further revise their inflation target upwards” later this year.

“Of course, the global environment is not as favourable as it was predicted to be at the beginning of the year. But I'm not sure if that implies that the central bank will keep rates higher for longer. I hope it does. But now we see - after the local elections - that they have shifted the output gap to the right and allowed for a faster growth rate. It raises questions about the degree of political independence that the central bank has.”

The announcement by Finance Minister Mehmet Simsek earlier this week of government spending cuts aimed at supporting the central bank’s efforts is a step in the right direction, Demiralp said, though largely symbolic.

“The overall size of the package is not that clear,” she said. “It has more of a signal value, in that if you are going to go through a period of economic slowdown it makes sense to indicate that it is going to hurt those at the top as well. What is really needed is tax reform and greater transparency regarding the subsidies that are provided to certain companies. The harder steps are yet to come.”