MNI INTERVIEW: Top End of CBRT Target Range In View - Ex-DG
MNI (LONDON) - The Central Bank of the Republic of Turkey should be able to bring inflation below the upper end of its 2025 forecast range while continuing to cut interest rates, a former CBRT deputy governor told MNI, but headwinds at home and abroad mean easing will slow in the months ahead.
Services contributed most to the pick-up in monthly inflation seen at the beginning of the year - from 1.03% in December to 5.03% in January - a third of which can be attributed to annual adjustments to healthcare costs, Ibrahim Turhan said in an interview, noting that core goods price growth was only 0.7%.
It would be realistic to expect year-end average inflation of 28%, from 42% most recently, he said, with monetary policy remaining tight even as the the 1W Repo rate eases gradually to 35% from the 45% it reached in January following a second 250-basis-point cut.
"All-in-all, I expect the central bank policy rate to be around 35% by the end of this year, said Turhan, a former member of parliament for the ruling Justice and Development Party. “I would say 25% inflation is the optimistic scenario, and 27-28% the base case,”
In February the CBRT revised its interim target inflation rate up 3 percentage points to 24%, with the band ranging from 19-29%.
“Until the end of June there is room for a minimum of 450 basis points and a maximum of 600 basis points of further interest rate cuts. Possibly one cut in March, another in April, and another in June,” Turhan said. “While I expect interest rate cuts to continue, there will be a lower gear, and the size of interest rate cuts will be lower in the last two decisions.” (See MNI EM INTERVIEW: Turkey Inflation Too High For 250Bp Cut -Cangoz)
INFLATION EXPECTATIONS
In February, 12-month-ahead market participants’ annual inflation expectations decreased by 0.1 percentage point to 25.3%, and by 1.9 points to 41.9% for the real sector, but household expectations rose 0.4 of a point to 59.2%.
Turhan emphasised the importance of corporate inflation expectations.
“As long as expectations are coming down, this will provide [the CBRT] with the confidence to move forward,” he said.
Turkey has not seen a significant drop in economic activity since returning to tight monetary policy, Turhan noted, with most of the decline in growth due to subdued European demand for Turkish goods. But the central bank has still been able to drive inflation lower.
“Credit rates for a loan were 60% at the beginning of 2024 and remained at 60-65% for a substantial period of time. This really did decrease the ability both to consume and to invest. In that sense the central bank’s policy had a definitive, determining impact,” he said.
Nonetheless, Turhan pointed to upside inflation risks. U.S. trade policies and government spending could drive up global yields. The opening up of neighbouring Syria could feed demand for consumer goods with a relatively high weight in Turkey’s inflation basket, and a potential increase in military spending could also trim an expected decline in the government’s budget deficit from 5% of GDP in 2024.
FOREIGN RESERVES
Record foreign exchange reserves accumulated by the central bank, coupled with an-time high in the CBRT’s net foreign exchange position, means Turkey is well protected from any potential exchange rate risk brought about by trade wars between the U.S. and Europe, according to Turhan. Even a lira depreciation of 42% against the dollar would only add 4-5% percentage points to inflation, given tight monetary policy and a supportive fiscal stance, he said.
Demand for Turkish assets also looks strong, said Turhan, a former Turkish stock exchange chair.
“Starting from the middle-end of the second quarter I expect portfolio investments into Turkiye to accelerate."