MNI INTERVIEW: Turkey Inflation Too High For 250Bp Cut -Cangoz
MNI (LONDON) - The Central Bank of the Republic of Turkey will need a significant slowdown in the pace of price growth if it is to cut interest rates by another 250 basis points in March, a former senior Turkish government official told MNI, adding that inflation is likely to end the year above the interim target rate.
While the CBRT’s overall stance is highly restrictive, and inflation expectations are moderating as credit expansion slows and domestic demand weakens, inflation remains too high, at 42% in January, for a third consecutive 250bp cut to the 1W Repo rate from its current 45% in March, said M Coskun Cangoz, a former chief economic counsellor to the Turkish Treasury.
“Under current conditions, achieving a 24% inflation rate by year-end seems challenging. Service inflation remains high, and considering the hard winter conditions and that Ramadan is approaching, food inflation will probably stay high for another couple of months, he said, noting that the CBRT revised its projection for inflation for 2025 from 21% to 24% earlier this month, citing a 1.7% increase in administered prices.
“The timing of TCMB’s next rate cut is critical. If February inflation gives a signal of a significant decline, the Central Bank will probably cut another 250bp. However, as I expect a relatively slow decline in inflation in the second half of the year, the policy rate is likely to remain at around 40%. My inflation expectation is around 30%,” Cangoz said.
While recent CBRT surveys show moderating household and corporate inflation expectations, further improvements are needed if pricing behaviour is not to stay rigidly high, said Cangoz, now director of the Center for Studies on Fiscal and Monetary Policy in Ankara.
INCREASED TRANSPARENCY
“Increased transparency in communicating inflation forecasts and its firm stance against inflation are positive steps in managing market expectations. However, given the frequent shifts in policy direction in the past, market participants remain cautious. As monetary policy stabilises, the CBRT’s reaction function will likely become more predictable over time.”
Should inflation expectations not move downward in the second half of the year and services inflation prove stickier than expected, the CBRT may have to revise its projections upward once again, Cangoz said.
“On the other hand, if the contraction in domestic demand narrows more sharply and disinflation accelerates, downward revisions may also be on the table in the second half of the year,” he added.
A slowdown in European growth is also affecting Turkey, he noted, and geopolitical uncertainties, which can significantly impact energy prices, trade balances, and investment flows, will play a critical role in shaping the CBRT’s monetary policy decisions in the months ahead.
However, fiscal policy performance will be as important as CBRT policies in determining the course of inflation expectations and rebalancing domestic demand, he added, with a fiscal policy consistent with tight monetary policy still to be implemented.
“Budget implementations have not provided enough support in the past two years. Therefore, it is necessary to closely monitor the budget performance in the coming months to see whether the targeted 3% deficit can be achieved.”