CORRECTS-MNI INTERVIEW: CBRT To Cut 2-3 Times By Feb-Cangoz
MNI (LONDON) - (Corrects headline and first paragraph)
The Central Bank of the Republic of Turkey is likely to cut rates in December and January, and perhaps in February as well, a senior ex-Turkish Treasury official told MNI, adding that it will miss inflation targets for the next two years without determined fiscal policy support. (See MNI EM POLICY: CBRT Likely To Cut In December As Past Hikes Bite)
“Depending on inflation inertia, it would be safer for the central bank to start the interest rate reduction process after seeing that a downward trend has begun. However, the central bank will probably make a 150-250 basis-point interest rate reduction in December rather than waiting for another month or two,” M. Coskun Cangoz said in an interview.
Looking ahead, it would be wise for the CBRT to act on a meeting-by-meeting, data-dependent basis, Cangoz said. “However, considering the contraction that has been seen in the last two quarters, I would expect that the bank will probably cut interest rates two or three times in a row.”
Rate-setters will also need to convince the Turkish public that their evidence-based approach means inflation is being broken, he said, “Otherwise, the credibility gained in recent periods will be questioned.”
Concerns over the central bank’s exposure to political interventions will in any case remain in the absence of a legal framework to ensure that the governor and Monetary Policy Committee members remain in office until the end of their terms, he added.
INFLATION TARGETS
Should inflation decline from November’s 47% in line with 2025’s 21% target, a total annual reduction in interest rates of 20-25 percentage points from today’s 50% would not be surprising, Cangoz said. Even then, the Bank may struggle to slow the pace of price growth much below the 26% upper limit of next year’s tolerance band, while 9% in 2026 appears out of reach.
“For 2024, the inflation projection of 44% seems reasonable. However, I find 21% optimistic for 2025. An inflation rate of around 25% in 2025 would be a success. I do not think a single-digit inflation will be achieved in the next few years.”
Savings rates and wage increases will all play important roles in determining inflation’s course in the coming months, Cangoz said. However, much of the inflationary inertia seen during the past year is a result of the delayed pricing responses by businesses.
“It can be expected that the real sector will be supported with macroprudential measures, such as easing commercial credit conditions to some extent, and that some incentives could be put in place to facilitate production and trade activities for export rather than domestic consumption,” he said.
Fiscal policy remains crucial to the success of the easing cycle, Cangoz said, noting that despite austerity measures in 2024, government expenditures are expected to exceed the budget's new year targets, according to official estimates.
“If fiscal policy does not show a determined and strong performance in 2025, it is not realistic for the budget deficit to fall to 3%. In such a case, as in the second half of 2023 and in 2024, monetary policy will not receive the necessary support from fiscal policy, and the targeted levels of inflation will not be achieved,” he said. (See MNI EM INTERVIEW: CBRT May Cut To Boost Growth-Ex-Gov Official)