MNI INTERVIEW: Turkish Cenbank To Miss Mid-Term Price Targets

Failure to address the causes of persistent high inflation means the Central Bank of Turkey's medium-term price targets look out of reach, economist Meryem Goekten told MNI, citing high corporate borrowing and lack of public trust.

Inflation is likely to come in at 40-42% this year, above the latest target of 38% though within the central bank’s tolerance band, said Meryem Goekten of the Vienna Institute for International Economic Studies, adding that this implies the CBRT expects economic growth of only about 2.5%, versus the government’s 4% objective.

She saw however little chance that the end-2025 and end-2026 inflation projections of 14% and 9% would be achieved, and expected prices “to be much stickier over the next two years than the central bank does.” (See MNI EM INTERVIEW: CBRT On Track To Hit Target- Ex-Deputy Governor)

Austerity measures announced by Finance Minister Mehmet Simsek look “more like a political than a fiscal austerity package - which is not surprising given the recent inflation developments, deteriorating financial conditions and the latest local election results, which are a consequence of these issues,” she said in an interview.

“What we still don’t know - because Mr Simsek did not give a number - is how much the austerity package will impact the budget deficit. Nor did he touch upon such important issues as public tenders for big government contracts, around which there is no transparency. He also didn't say anything about broadening the tax base to make it fairer or cutting the tax subsidies in very unproductive sectors.”

LOANS TO BUSINESS

The government will try not to hike public sector wages significantly, she said, adding that any increases to taxes or administered prices would only add to inflation. The central bank should also take steps to slow the growth of large bank loans to business, she said, rather than focusing predominantly on prudential controls to contain personal spending.

“To effectively combat inflation and get the expectations to align with the CBRT forecasts, the government needs to address both the supply and demand side drivers of inflation,” Goekten said, adding that “the burden of these fiscal reduction packages appears to sit on the shoulders of those on fixed and very low incomes.”

Despite having adopted a more consistent policy approach since March, when it raised rates by 500 basis points, the CBRT still struggles with a lack of public trust, Goekten said, noting that this was compounded by popular scepticism towards the often vastly different inflation numbers distributed by other institutions.

“The Turkish Statistical Institute, the Istanbul Trade Association and other inflation research institutes such as the inflation research group ENAG have produced wildly different inflation numbers in recent months, and all of these discrepancies among inflation figures indicate a credibility problem, making it very difficult to change people’s perceptions of inflation,” she said, noting that the CBRT is “well aware” of the gap between its own inflation expectations and those of external surveys. (See MNI EM INTERVIEW: CBRT Inflation Target May Go To 45% - Demiralp)