MNI INTERVIEW: Lira Strength Key To CBRT Easing Pace- Demiralp
Turkey’s central bank will look to the lira exchange rate and financial market stability in deciding how fast to ease monetary policy, but high domestic inflation expectations may temper the pace of cuts over the coming months. a leading Turkish economist told MNI.
“The appetite for dollarisation will be the key factor. The CBRT wants to ease without destabilising financial markets,” Professor Selva Demiralp said. “That means it will be closely monitoring pressure on the exchange rate and watching for any signs that capital is fleeing the lira. Maintaining financial stability will dictate the pace of further easing.”
Dollarisation risks remain due to political uncertainty and weak policy credibility, said Demiralp, Director of the Koc University-TUSIAD Economic Research Forum, with 65% of Turkish households distrustful of current economic policies, and only 15% content. (See MNI BRIEF: Turkish Household Inflation Expectations Decline)
“Even though inflation is declining, purchasing power is eroding and the public continues to bear the brunt of the adjustment. In such an environment, supporting demand through lower rates while promoting lira-isation becomes an uphill battle.”
The CBRT lowered interest rates by 300 basis points last week - a surprise to the majority of analysts, who expected a 250bp cut - to leave the key 1W repo rate at 43%. (See MNI EM CBRT WATCH: CBRT Cuts 300Bp as Underlying Inflation Flat)
The easing cycle is now officially underway, as indicated by the removal from the July decision’s statement of references to the lagged effect of previous moves and using policy tools “decisively regarding [the] tight monetary stance,” Demiralp said. This implies a September cut, with the interest rate corridor moving symmetrically going forward, she said.
The size of the first cut of the cycle appeared to be at odds with the cautious approach to easing telegraphed by Governor Karahan in remarks to investors following the recent increase in the withholding tax, making it “hard to say” whether 300bp will become standard, she said.
STEP SIZE
The CBRT has said the step size will be “reviewed prudently on a meeting-by-meeting basis with a focus on the inflation outlook,” and Demiralp said that a 50bp difference either way “feels like a rounding error rather than a meaningful signal."
The easing process could also be at risk if July’s hikes in regulated prices - which are seen temporarily raising inflation after two months of flat data - have a longer-lasting impact on inflation expectations, Demiralp said.
“Even temporary increases can influence inflation expectations, especially if markets perceive the central bank as being overly dovish. In that case, expectations can become unanchored, which would undermine the disinflation process.”
Overall inflation risks remain broadly balanced, Demiralp said, with inflation - currently at 35.05% according to official figures - likely to end the year slightly above the CBRT’s 29% target, at 32%.
“On one hand, domestic political tensions and global trade frictions pose upside risks. On the other, the cumulative effect of earlier rate hikes is becoming more visible. Particularly after the reversal of the easing cycle post-March 19, real interest rates have reached their highest levels since the 2023 elections—providing an important disinflationary buffer,” she said. (See MNI EM POLICY: CBRT Hopes To Hold Course After Lira Storm)
Only once the CBRT is confident that lira-denominated loans are not being used to purchase foreign currency will it begin to loosen its macroprudential toolkit to support monetary policy easing, she added.
Monthly growth limits for TRY-denominated commercial loans will eventually be increased in line with the easing cycle, Demiralp said, but it is difficult to say when the central bank will feel comfortable enough to do so.
“Financial stability is key. Political risks remain elevated, and the threat of renewed dollarization is real. The central bank will likely move cautiously.”
