MNI INTERVIEW: CBRT To Cut Rates From Q4- Ex-Treasury Official

MNI (LONDON) - Easing price pressures and a stable currency will prompt the Central Bank of Turkey to its first cycle rate cut early in the fourth quarter, but it will struggle to meet its year-end inflation target of 38% even with more restrictive fiscal policy, a leading economist told MNI.

“I believe that the CBRT will start to reduce interest rates in the last quarter, likely in October, considering the interest rate reduction process of important foreign central banks and the fact that inflation will decrease in Turkey due to the base effect,” M. Coskun Cangoz said in an interview.

Policymakers will carefully lower the policy rate - currently 50% - over the remainder of 2024, speeding up the easing process in early 2025, "taking into account factors such as the interest rate cut preferences of other major central banks, geopolitical developments, whether the course of the exchange rate is stable due to FX inflows from abroad, and the strengthening of the decline in consumption,” he said.

The CBRT’s macroprudential stance will also be rearranged once a permanent downward trend in inflation is established, Cangoz said.

“Depending on the persistence of the decline in inflation, TCMB may have more courage in rate cuts starting from the first quarter of 2025,” he said. “However, if it won’t be supported by fiscal policy, an aggressive interest rate cut may be considered as a U-turn in CBRT policies. Additionally, considering that economic actors' inflation expectations are still high, I think the year-end inflation will be over 38%.” (See MNI EM INTERVIEW: Turkish Cenbank To Miss Mid-Term Price Targets)

SPENDING CUTS

Finance Minister Mehmet Simsek has announced tax changes and spending cuts expected to reduce the budget deficit by around 0.5% of GDP.

“The current outlook indicates that the 2024 budget will close with a deficit at the level of 2023, that is, at 5-5.5% compared to GDP. However, in order for the 2025 budget to be 3%, in line with the government target, a strong stance must be taken in the Medium Term Program,” Cangoz said.

While the CBRT will be reluctant to see the lira strengthen much more, its recent stability could mean inflation in 2024 declines faster than central bank expectations, helped by tightening credit conditions and a potential contraction in consumption, said Cangoz, a former World Bank manager, director general of the Turkish Treasury and chief economic counsellor to the Turkish Embassy in London. (See MNI EM INTERVIEW: CBRT On Track To Hit Target- Ex-Deputy Governor)

Now head of Fiscal and Monetary Policy Studies at the Economic and Policy Research Foundation of Turkey, Cangoz was “surprised” by a newly-published CRBT Sectoral Inflation Expectations measure which found households’ 12-month expectations at 55% between January and June 2024. By contrast, a recent Koc University/TEBA survey found households perceive annual inflation at 113%, with year-end expectations at 93%, and the 12-month figure at 97%.

The same CBRT release suggested market participants’ year-ahead inflation expectations were 31.8% - substantially below the TCMB’s 38% 2024 target, but still significantly above the 14% year-end target for 2025.

Annual inflation fell to 71.60% last month from 75.4% in May, according to the Turkish Statistical Institute. While a decline was expected - due largely to postponed increases in administered prices, seasonal effects and a stable lira - Cangoz was surprised by its extent.

DATA DOUBTS

Persistent discrepancies between inflation results presented by the central bank, TURKSTAT, the Istanbul Chamber of Commerce and inflation research group ENAG, highlight a lack of methodological consistency and transparency, Cangoz said.

“There is no reliable benchmark and it is difficult to say whether TURKSTAT data is accurate or not. The only thing that everyone agrees on is that TURKSTAT inflation is lower compared to the inflation of the people on the street,” he said.

“In a sense, market participants need to be convinced. This still indicates that the credibility of the CBRT is not high enough.”

The CBRT’s decision to publish its own expectations data is a “message to the public that household expectations are relatively high, but that it is also on a downward trend, as we may hear in the future months as a part of its communication.”

Higher wages are likely to exert continued upward pressure on inflation in coming months, Cangoz said, and demand for consumer loans and mortgages could increase as rates fall, though borrowers are already stretched.