MNI INTERVIEW: CBRT To Cut 600bps After June Hold -Turhan

The Central Bank of Turkey is likely to leave its policy rate untouched at 46% next week, but could reverse April's overnight lending rate hike as annual inflation closes in on the CBRT’s 29% target, former deputy governor Ibrahim Turhan told MNI.

“I do not expect rate cuts this month, but having also added to an additional tightening bias by increasing the overnight lending rate from 46% to 49% I would expect that to be reduced to a level closer to the policy rate of 46%,” Turhan said. “I definitely expect inflation to be below 30% this year - I have no doubt about that - before converging to around 15% by the end of 2026.” (See MNI EM INTERVIEW: CBRT Will Raise Target, Tighten - Demiralp)

Turhan, formerly an MP for the ruling AKP party and now founding partner of Quanta Financial Consultancy, noted that May’s inflation rate for services was below the inflation rate for goods, indicating that the inertia behind a key driver of the headline rate has begun to crack and leaving scope for future cuts.

“Headline inflation will fall by a further 1% in June, bringing it below 35% - which is exactly what I predicted would be the case last year - leaving room for around 600 basis points of cuts to the policy rate over the course of July, September, October and December.”

ELECTION GIVEAWAYS

Nevertheless, with fiscal giveaways ahead of a probable 2027 presidential election and a public vote on constitutional amendments likely to affect the medium-term inflation outlook, the CBRT will want to maintain both a tight monetary policy stance and a hawkish tone to communications.

“Our base case scenario is that the existing political situation and economic policy will remain until the end of 2026, and will enable the government to cut down the fiscal deficit to a comfortable level, while bringing inflation down close to single digits, but not quite. Probably somewhere around 10%." (See MNI EM INTERVIEW: FX Passthrough Key To CBRT Outlook - Cangoz)

Thereafter fiscal stimulus is to be expected, said Turhan, who also served as vice chair of the Parliamentary Committee for Budget and Planning, albeit not on the scale of 2021, and with the central bank allowed to act “quasi-independently.”

“That means that there will be some credit growth, but not excessively so. There will be no double-digit negative real interest rates this time, so it will not cause inflation to the degree that it did last time, nor will it lead macro imbalances to deteriorate completely, as was the case last time. But of course, there will be higher inflation two years from now.”

LIRA

Should the lira weaken significantly as a result of political developments the CBRT will again prioritise control of the exchange rate, though the bank may be reluctant to expend such a heavy share of its foreign exchange reserves as in March and April

“My suspicion is that should they need to do so again they will not be as aggressive; they will not purchase everything," Turhan said. "At certain levels, at certain points, they will have to sterilise the foreign exchange area. But they acted very prudently by forcing the foreign investors who are interested in taking a Turkish position to invest in Turkish bonds, rather than money markets.”

Turkish financial conditions are becoming tighter, Turhan said, leading to increasing difficulties for firms, said Turhan. Bankruptcy rates are also up, though many affected firms were “zombie companies” kept standing by government subsidies and guarantees that have since been withdrawn, he added.

“The adjustment we’re seeing now in the form of rising bankruptcies is not an easy one - shops are closing down, businesses are failing and, sadly, people are losing their jobs - it is a necessary reality. And, of course, the same thing is happening in Europe and the U.S. post-Covid,” Turhan said. 

“This is a global structural change, and while at an individual level it leads to suffering, in macroeconomic terms it is not necessarily bad. From the perspective of the CBRT, which is trying to bring down inflation by lowering domestic demand, it is undoubtedly beneficial.”