MNI INTERVIEW: CBRT Hard Work To Start In 2027 - Ex-DG Turhan

Turkey’s central bank will bring real interest rates to 4% by the end of this year - the last chance it has to keep policy restrictive ahead of possible parliamentary and presidential elections in 2027, former deputy governor Ibrahim Turhan told MNI.

The CBRT has pared back the spread of interest rates over inflation from around 1,000 basis points in March to 800bp now, with the one-week repo policy rate at 38% going into this week's decision meeting. (See MNI EM CBRT WATCH: 150Bps Cut Expected As Progress Continues)

“I expect this spread to become something like 400bp by the end of this year, because there is no foreseeable risk - in terms of the currency, credit conditions and so on,” Turhan said, adding that he expected a 150bp rate reduction in January, with similarly-sized cuts at every meeting thereafter.

Market expectations of 4% monthly inflation in January should be seen in the context of 5% price growth in the same period a year earlier, he said, with deceleration throughout 2025 despite inflation above historic averages for April, May, June, July and August. (See MNI INTERVIEW: CBRT To Look Through Early 2026 Inflation Rise)

“If we take a relatively conservative forecast for the year, inflation at 22%, that’s only 300 basis points above the upper band of the central bank’s forecast. Therefore, even if we err to the safe side, a 400 basis points spread would imply interest rates of 26-27% by the end of the year,” he said.

“We’re likely to see easing of 100-150 basis points at each meeting - even if there is some volatility in January and February’s monthly inflation readings - especially once one takes into account the more pronounced normalisation taking place in services sector price growth.”

SMOOTH PATH

In the absence of mistakes or a major recovery in oil prices, the CBRT should be able to get inflation to 15-16% relatively smoothly, he said. “The tough job will start afterwards - especially since 2027 will be a year where the political cycle will be more, I would say, vibrant.”

This year is probably the last year when it will be possible to enact tight monetary policy and restrictive credit conditions, Turhan said.

“My expectation is that the government will consider acting in a selective way to loosen credit conditions for export-oriented and high value-added industries. But it will not be a blanket measure, as it has been before, nor will it be a subsidy,” said Turhan, a former MP for the ruling AKP party and now professor of economics at Istanbul’s Istinye University and founder of Quanta Capital.

“They’ve managed to keep the manufacturing sector above the waterline, but it cannot continue like this.”

Nor has fiscal policy played an important role so far in supporting the central bank’s efforts to slow price growth, Turhan said.

“I don't think that fiscal policy really played a determining role in inflation in Turkey last year. If you look at core inflation, which excludes all primary and direct impacts of fiscal policy, it wasn’t too different from the headline inflation. I therefore wouldn’t argue for tighter fiscal policy for the sole reason of bringing inflation down,” he said.

“If you leverage fiscal policy too much - in addition to tight monetary policy and credit conditions - then you risk putting a lot of pressure on tradable industries over non-tradable industries.”