MNI INTERVIEW: CBRT October Cut 'Premature'-Ex-CBRT's Unalmis

The Central Bank of the Republic of Turkey is likely to raise its interim inflation target for 2026 after reducing interest rates by 100 basis points last week, a former senior CBRT official told MNI, adding that the cut was premature. (See MNI EM CBRT WATCH: Turkey CenBank Cuts 100Bp As Pressures Build)

The CBRT lowered its policy rate, the one-week repo rate, to 39.5%, but said the underlying trend of inflation increased in September. Demand conditions remain at disinflationary levels, it added, but the disinflation process has slowed down, with inflation above 33% in August and September.

“When a central bank cuts rates without providing the reasons why, it is generally premature,” Ibrahim Unalmis said. Macroeconomic developments meant risks to the inflation outlook were balanced before last Thursday’s decision, “so there was no legitimate reason to change the interest rate."

Market reaction to the move - and the resulting erosion of central bank credibility - was “limited,” said Unalmis, head of the CBRT’s markets department until 2018 and now professor of economics at Istanbul’s Bahcesehir University.

“My expectation was that they would keep interest rates unchanged this time because the trend inflation was actually going upwards after August and September, and the inflation expectations survey showed that inflation expectations are deteriorating for the year-end or 12 months ahead.”

The CBRT will publish its last Inflation Report of the year in November, when it will likely change its 2025 inflation forecast - the midpoint of which is currently 24% - Unalmis said.

INTERIM TARGET

“This also implies that CBRT will change the interim inflation target for 2026, because, given the current dynamics, reaching 16% is almost impossible. Two months ago my expectation for 2026 was 20%. I have increased it to 23% right at the moment.

“Market expectations for 2026 are between 20 to 25%. That in itself is not a good sign, because the distribution of expectations is getting wider, which is a sign of bad communication.” (See MNI EM INTERVIEW: CBRT Closing In On Inflation Target-Ex-Director)

Still, the CBRT appears set on easing the monetary stance further at the next meeting in December, he said, with November and December inflation traditionally relatively lower than September and October.

“If October’s monthly inflation is less than last year's October inflation of 2.88%, then year-on-year inflation will decline, which will help the central bank to go for a late cut.

“But at the beginning of the new year the minimum wage will be adjusted, as will regulated prices such as electricity and gas, so January will be another tough month in terms of inflation.”

Having succeeded in using interest rates and the exchange rate to bring inflation down from 75% to 33% in a little under 18 months, concerted action is needed from the political sphere if the pace of price growth is to fall much further, Unalmis said.

“Rent inflation is 70% at the moment  –  more than twice the headline inflation rate. Food inflation is high again compared to the other sectors, and that needs to be addressed directly. The announcement of new housing construction will help to reduce inflation, but it will take time. However, in terms of the expectations channel, at least, people will start to believe that the government is doing something in order to control the problematic areas like housing and food.”