MNI INTERVIEW: CBRT Closing In On Inflation Target-Ex-Director

The Central Bank of the Republic of Turkey looks on track to bring inflation close to target this year, a former senior central bank official told MNI, pointing to last week’s decision to cut rates by 250 basis points and no longer cite the need for lira appreciation to support the disinflation process as a sign of confidence.

Inflation will end the year at 29-30% - above the official target of 24%, but close to the 25-29% level projected by the CBRT. However, 2026’s 16% target looks “very ambitious” even if, as expected, monetary policy remains tight, Ibrahim Unalmis said in an interview after the CBRT cut the 1w repo rate to 40.5%.

“My inflation forecast for 2026 is 20% at the moment, which is close to the upper end of the central bank's forecast, at which point I would also expect a policy rate of around 26%. Or I would expect a 600bp spread between the inflation rate and the policy rate,” said Unalmis, formerly head of the CBRT’s markets department, now professor of economics at Istanbul’s Bahcesehir University.

While real-terms lira appreciation against the dollar was an important element in the slowdown in price growth seen especially after May 2024, further currency strength is likely to be more muted, he said.

“Removing that phrase from the decision statement is therefore a sign that the central bank is also no longer much concerned about the real appreciation of the Turkish Lira against the U.S. dollar,” he said.

SURPRISE DECISION

The CBRT eased by 300bp in July, but surprisingly high inflation figures for August, stronger-than-expected second-quarter GDP growth numbers, and market turmoil following days of political unrest, led many analysts to lower rate-cut expectations ahead of September's Committee meeting. (See MNI EM CBRT WATCH: Turkey Cuts 250BP, Removes Lira Reference)

The eventual decision to trim another 250bp from all three rates was a surprise to most, though in line with Unalmis’s own expectations, he said, given that Turkish risk premiums rose by only 6-7% following the announcement of a court ruling against the opposition CHP party leadership. 

Domestic demand for U.S. dollars was also nothing like that seen during last March, he said, requiring FX intervention of only USD5.5 billion, compared with some USD50 billion six months ago.

"Although the central bank could have done a 300bp cut, it could have sent the signal that it does not care about developments. I think the CBRT has given the right signal for the market.  But 100bp, for example, would have represented an extremely strong reaction.”

Maintaining an asymmetric rate corridor of 300bp means policymakers can react to adverse developments in the economy, in the political arena or elsewhere in the region, Unalmis said, adding that a key characteristic of the CBRT under Governor Fatih Karahan has been its predictability and commitment to maintaining a tight policy stance.

The Bank has also worked hard - including in behind-closed-doors meetings with investors in London and Turkey - to keep inflation expectations stable, “and they have done that,” Unalmis said.

“Now we understand that it is prepared to do whatever is necessary. Obviously this week some foreign and domestic investors sold first, then tried to work out what was going on. The political landscape in Turkey will remain unpredictable in the coming future,” he said.

MANUFACTURERS HIT

“And when we look at the gap between the inflation rate and the policy rate it is historically wide, so monetary policy really is tight. Another indicator is the difference between the two-year and ten-year Treasury bond rate, which is at the highest level of the last 15 years.”

Yet Turkey’s manufacturing sector has been affected particularly badly by the current cycle, Unalmis said, adding that unlike in 2019, when monetary policy was also tight, it has been unable to compensate by channelling production into exports due to weak European demand.

“Exports are either decreasing or increasing only marginally, the exceptions being the more technologically-advanced sectors, such as defence and automobiles. If monetary policy is kept too tight for too long, then they too will be badly affected. So the central bank has to find a balance between fighting inflation and the financial health of the country.”