MNI INTERVIEW: CBRT To Cut 100Bps With Credibility In Focus

The Central Bank of Turkey’s likely decision to cut rates next week despite inflation holding steady at 33% risks damaging the credibility of monetary policy without continued disinflation, leading Turkish economist Selva Demiralp told MNI, adding that further strong price data could force a pause to the easing cycle.

A probable 100-basis-point cut next week will mean policy remains tight, “however, given the surprise strength in headline inflation in September, following up with a rate cut could send the signal that the easing cycle is on auto pilot,” Demiralp said.

“I would wait for the next couple of inflation releases to see the trend in inflation. If the trend is indeed positive, then a central bank that continues to cut rates, albeit at slower increments, would lose credibility. If the disinflation process continues however, then I would not worry too much about CBRT’s credibility.”

The CBRT cut its policy rate, the one-week repo rate, by 250 basis points to 40.5% in September, citing an August slowdown in the underlying trend in inflation. Yet September’s annual inflation rate exceeded analysts’ expectations at 33.29%, a 3.23% rise in monthly terms.

The CBRT stated in its August Inflation Report that there was a 70% probability inflation would end the year between 25% and 29%. A figure closer to 32% looks more realistic, Demiralp said, with November’s Inflation Report likely to see the central bank shift its confidence interval up by 2-3 points. (See MNI EM INTERVIEW: CBRT Closing In On Inflation Target-Ex-Director)

PRIVATE SECTOR COMPLAINTS

Demiralp, a professor of economics at Koc University, said she understood that the central bank was coming out of a long tightening cycle and faced increasingly vocal complaints from the private sector. 

“However, if I were in charge of the decision, I would likely pass this meeting to reinforce the hawkish signals that Governor Karahan gave at the national assembly earlier this month.”

One stronger-than-expected data point will not cause policymakers to reevaluate the direction of monetary policy, but a series of adverse readings could make them think again, Demiralp said.

“If the upwards stance [of inflation] continues, they would need to pause the easing cycle at a very minimum and consider tightening again if necessary. I don’t think it will be easy for them to justify a tightening to the government, but they might pause the easing.”

The effects of tight monetary policy on prices look increasingly embedded among households, Demiralp said.

“Our survey results at Koc University show that household inflation expectations are declining since April. This is a good sign because even though the level is still high, the average household is under the impression that the policies are working.”