MNI INTERVIEW: CBRT To Cut 100Bp in Dec, Keep Targets-Turhan

Turkey’s central bank can likely afford to cut key interest rates by another 100 basis points in December without seriously jeopardising its chances of nearing its 2026 inflation target, former deputy governor Ibrahim Turhan told MNI, although Q1 data will be critical. (See MNI EM CBRT WATCH: Turkey CenBank Cuts 100Bp As Pressures Build)

The CBRT could have afforded to ease by up to 250bp in October, but instead acted “prudently” and in line with its preference to “always remain on the safe side” when it lowered the policy rate to 39.5%, he said in an interview. “What matters is that the easing cycle is continuing, and that there are more cuts to come."

Underlying inflation increased in September and disinflation slowed, the CBRT said last week, with upside risks to the outlook coming particularly from food prices.

“If you look at last October and November’s figures for unprocessed foods, especially vegetables and fruits, they recorded a 40% increase due to the transportation costs,” said Turhan, founding director of Quanta financial consultants and professor of economics at Istanbul’s Istinye University.

“This year this is not the case, and the change of season is happening smoothly. I expect unprocessed food prices will normalise over the next two months.

“Except for food prices, I don't see any serious risk that will cause a significant deviation from the interim targets. Expected inflation is, on average, close to 25% for the 12 months ahead. Actually, this is what matters, not the inflation today.”

Nevertheless, supply side shocks have to be monitored carefully while making monetary policy decisions, he said. “So it's a delicate issue, which I think they are taking into consideration.”

Inflation is likely to end the year slightly above the upper bound of the central bank’s forecast range, at around 31%, Turhan said, with 2026 inflation coming in close to 20% versus a CBRT interim target level of 16%. The CBRT is unlikely to change the interim inflation target for 2026 in November’s Inflation Report, he added.

“The policy rate is already more than enough to contain inflation expectations and keep domestic demand under control. Inflation of 20% for the next year is good enough for the economy. and I don't think that it will be a problem for the central bank or other decision makers,” Turhan said.

CUT JUSTIFIED

“Certainly they will want to assess developments between now and the end of the year, but the first quarter of next year will be critical, because this is where seasonal inflation shows some rigidity and inertia. If the first quarter is fine, I don't see any reason why the central bank should announce a change to the interim targets.”

Further easing is almost certain, Turhan said. Only if there is a major deterioration in general pricing behaviour or evidence of significant inertia in critical items such as food, rent, transportation and communications will the central bank reconsider the size of the rate cut in December, “but it will be a rate cut for sure, probably by another 100 basis points.”

Turhan also defended CBRT communications, amid criticism that it failed to fully justify its latest rate move. (See MNI EM INTERVIEW: CBRT October Cut 'Premature'-Ex-CBRT's Unalmis)

“If the central bank does have a communication problem, it is not because of lack of communication or poor communication; rather it is because people cannot read the new world and the new Turkey. They are still defaulting to the causalities or correlations that existed in a fully-integrated global world, where the liberal economy, the free market economy, free trade, was king. This is no longer the case.”

This new, mercantilist world order has led to development of unorthodox correlations between asset classes, Turhan said, with the price of gold perhaps the most obvious example. 

“There is a portfolio adjustment due to the loss of confidence in the long-term economy, policies and reliability of the United States. Central banks too are changing their portfolio choices. If you try to make estimations based on the models of the early 2000s you will get lost. The same applies to monetary policy decisions.”

Turhan is a former member of Parliament for incumbent president Recep Tayyip Erdogan’s Justice and Development Party (AKP).