MNI INTERVIEW: CBRT To Focus On Real Rate Stability - Demiralp

The Central Bank of Turkey will look to bring real interest rates closer to 5% in 2026, but will lower policy rate by less than the 300 basis points needed to do so next week, despite November’s much lower than expected monthly inflation number, leading Turkish economist Selva Demiralp told MNI in an interview.

The CBRT cut its policy rate by 100bps to 39.5% in October with headline inflation at 32.9%, leaving real rates close to 6.5%. But annual CPI inflation of 31.07% and 0.87% m/m, a significant downside surprise on market predictions, led investors to increase cut expectations to 200bps on Wednesday. The Monetary Policy Committee is set to meet next week. 

Demiralp, Professor of Economics and Director of the Koc University-TUSIAD Economic Research Forum, sees the spread between interest rates and inflation broadly maintained in December, but believes it will narrow next year.

“In Governor Karahan’s most recent interview, he emphasized that the policy rate will follow the direction and pace of inflation. My interpretation is that the CBRT intends to maintain a broadly stable real interest rate -- likely around 5% -- for at least the first half of the year."

Having fallen by around 12% in 2025, next year’s decline in inflation will be closer to 6 percentage points, said Demiralp. The CBRT can also be expected to pause the easing cycle or slow the pace of cuts in order to maintain a higher real interest rate should political tensions escalate rapidly.

“I do not expect the CBRT to assume that political tensions will ease in 2026; therefore, they will likely avoid reducing the real rate much below 5 percent,” she said.

TARGET MISS

November’s announcement that the central bank will miss this year’s 24% inflation target, with inflation instead forecast to end the year at 31-33%, will not meaningfully impact households’ own assessments of price pressure, Demiralp said.

And while the decision to stick to a 16% target in 2026 is unlikely to anchor household inflation expectations, exceeding it is unlikely to push them up by much, she said, citing Koc University Survey of Household Inflation Expectations data that indicates sentiments are highly correlated with headline measures. (See MNI INTERVIEW: More CBRT Cuts Boost De-anchoring Risk - Cangoz)

“As the disinflation process has slowed, household expectations have also lost momentum. After falling sharply from 68 percent to 58 percent between April and September, year-ahead inflation expectations have plateaued at around 53 percent for the past two months,” she noted.

Recent expansion in consumer lending underscores the importance of closely monitoring household inflation expectations, said Demiralp, with the current credit boom suggesting both that real ex-ante lending rates remain relatively low, and that prolonged high inflation has boosted households’ reliance on consumer loans to maintain their standard of living.

NPL CHALLENGE

The growth of non-performing loans, with delinquency rates rising across all consumer categories, according to Banking Regulation and Supervision Agency (BDDK) figures, is concerning, but may also play an important role in explaining the easing cycle, Demiralp said.

The primary motivation for CBRT easing appears to be financial-stability concerns after more than two years of tight monetary policy "which have pushed NPLs higher and increased the risk of bankruptcies,” she added.

But the government’s announcement that it will set certain fees and taxes next year below the Revaluation Rate may indicate that authorities are committed to continuing the fight against high inflation, Demiralp said.

“From both a technical perspective and an expectations-management standpoint, raising certain taxes and fees by less than the revaluation rate is a favourable move," she said, noting it would help in the overall battle to get expectations in line.