MNI EM INTERVIEW: CBRT Overnight Repos Out Until Summer
The Central Bank of the Republic of Turkey will wait until after the impacts of the Iran war fade before resuming its one-week repos and normalising monetary policy operations, though the path of rates later in the year is unclear, a prominent economist who was formerly a CBRT official told MNI.
Currently, the CBRT is supplying liquidity at the 40% overnight rate, effectively tightening conditions after it suspended on March 1 the one-week repo operation which constituted its main policy tool and which had been offered at 37%.
If "the war ends and oil price declines below USD90, and then Turkey started to attract more and more tourists during the summer season ... then maybe the central bank [would] return to the normalisation," Ibrahim Unalmis, professor of economics at Istanbul’s Bahcesehir University, said in an interview.
"If the war ends, [normalisation] can happen during the summer," he said, adding that as long as the conflict continues "it means that uncertainty around the oil prices will continue, uncertainty will continue on the tourism revenues and so on."
INFLATION REPORT
The rate of increase in CPI rose to 32.4% in April, again interrupting a decline from a peak of over 75% in May, 2024, and the CBRT’s inflation report last Thursday saw it revise up its interim inflation target to 24% in 2026 from 16%, with Governor Fatih Karahan insisting he would maintain a tight monetary policy stance.
The CBRT held its overnight rate unchanged in April while stressing the uncertain impacts of the war, a move which Unalmis considered appropriate, because an increase in rates would have threatened corporate solvency. (See MNI EM CBRT WATCH: Holds Rates As 'Attentive To Upside Risks')
"If corporate failures increase because of the tighter monetary policy, it will create supply shock as well, so the production will decline, and in that case, the prices will can go further up,” he said.
"In June, probably they will keep the current interest rates stable," he said, adding that the Bank has not clarified the threshold at which it would hike to constrain inflation.
"We don't know the parameters of the reaction function. He made it clear that if we need further tightening in monetary policy, definitely they can take such a decision."
In its inflation report, the Bank also increased its interim inflation target for 2028 to 15% from 9%. The medium-term target remains 5%.
The bank has not clearly said what it will do if there is a slight overshoot of its interim target, which is now a point target after having previously been a range, Unalmis said.
"If the forecast deviates from target, let's say 2%, we don't know if the central bank will tighten or not,” he said.
The CBRT's survey of market participants on Friday found year-end inflation expectations were 28.94%.
EXCHANGE RATE POLICY
The central bank has kept its managed float exchange rate policy stable as it monitors the consequences of the war, Unalmis noted.
"The main component of the current disinflation process depends on the appreciation of the Turkish lira," he said, pointing to the exchange rate’s key role in fixing inflation expectations and the very high share of imported inputs in Turkish production.
Food prices are particularly salient to the formation of inflation expectations, and Unalmis said that the Bank believes good news is coming on these.
Vegetable and fruit prices rose by 50% in the first four months of the year, due to adverse climate conditions, but Governor Karahan expressed optimism "about the vegetable and fruit production this year ... so they are expecting lower price," Unalmis said.
Tighter financial conditions since credit card limits were decreased have reduced demand for imported white goods, luxury goods and durable goods, which should also ease inflationary pressures, he said.
"It is not related with the interest rate. It is not related with the direct supply of the credits, but related with the purchasing ability of the consumers ... I think it helps" with the disinflation process.
