MNI INTERVIEW: CBRT To Cut By Q1, Miss Price Target - Demiralp
MNI (LONDON) - The Central Bank of the Republic of Turkey will cut interest rates in Q1 2025 at the latest, leading economist Selva Demiralp told MNI, despite the fact that it is unlikely to hit the new inflation target set out in the country’s new Medium-Term Programme, with growth objectives also hard to achieve.
“There is a chance that the CBRT might cut rates in the last quarter of 2024,” Demiralp said, adding that if it did not do so then easing would come soon after. This would be despite the limited probability of achieving the target for next year’s inflation, which was revised from 15.2% to 17.5% in the MTP. (See MNI EM INTERVIEW: CBRT To Cut Rates From Q4- Ex-Treasury Official)
“Our forecast with my colleagues at Koch University is more like 30% percent for the end of next year, versus 33% four months ago during our last forecast round,” Demiralp said an interview.
“It’s also possible they do prefer the first quarter,” she said, noting that political pressure for a cut would mount as the economy slows.
Annual inflation for 2024 was projected to be 33% in 2023’s July Inflation Report, versus the 41.5% cited in the MTP for 2025-2027. With the CBRT having raised the benchmark 2W repo rate 300 basis points to 50%, year-end inflation of 43-44% is more realistic, Demiralp said.
Tighter fiscal policy and tax reforms that curb demand from higher income groups would aid the central bank’s cause, she added, however budget deficits are set to decline only “very mildly”, leaving the central bank effectively alone to fight inflation as best it can, while protecting households at the expense of the banking system.
“Our central bank is not only prescribing the medicine, but also trying to allocate the burden.”
GROWTH UNDERSHOOT
Growth should also undershoot MTP expectations of 3.5%, though it will still come in at around 3% “because we had the local elections and I don't think the central bank was allowed to tighten as much as it wished,” Demiralp said.
Next year’s downward revision for GDP - from 4.5% to 4% - is a move in the right direction, though the 3.5% potential growth rate pencilled into recent IMF and World Bank reports would be more “reasonable”, she said.
“If you assume a potential GDP growth rate of 3.5%, and if you use this number to decipher the central bank's implied growth rate from the inflation report, then you reach 0.2%. So the growth rate that is consistent with the 17.5% inflation target is around 0.5% according to the CBRT,” she said.
“Of course, even if it is closer to 27.5%, as in our forecasts, that still means inflation is going in the right direction, and perhaps the central bank will argue that in order to prevent businesses going bankrupt it had to move more slowly.”
Limited currency weakening - from an average exchange rate of 33 Turkish lira per dollar this year to 42 next year - is in the same ballpark as the change in the inflation target, Demiralp said, making the implied exchange rates in the mid-term “doable.”
Similarly, the MTP’s projected current account deficits of -2.0% of GDP for 2024 and 2025 may well be achieved, Demiralp said, as lower growth leads to reduced imbalances.
CREDIT UPGRADE
But subsequent declines of 1.6% in 2026 and 1.3% in 2027 are not compatible with projected growth rates of 4.5% and 5.0%, respectively, without major structural reforms, Demiralp said, “and I don’t think we are going to see any such shift.”
Turkey's credit rating has been upgraded by Fitch, Moody's and S&P in recent months, with greater fiscal and monetary coordination cited as key reasons for the improved outlook.
The CBRT has repeated that it will maintain a tight stance "until a significant and sustained decline in the underlying trend of monthly inflation is observed, and inflation expectations converge to the projected forecast range.”