MNI INTERVIEW: More CBRT Cuts Boost De-anchoring Risk - Cangoz

The Central Bank of Turkey will cut rates by up to 150 basis points next week, but it should be increasingly wary of inflation expectations becoming de-anchored amid rising credit-driven "distress" demand, credibility concerns and lack of fiscal discipline, the director of Ankara’s Centre for Studies on Fiscal and Monetary Policy told MNI.

With the one-week repo rate at 39.5%, markets are pricing in 100 to 150bps of easing when the CBRT meets next Thursday, M. Coskun Cangoz said in an interview. This would be consistent with policymakers’ emphasis on gradualism and the persistence of credit-driven demand pressures. (See MNI EM INTERVIEW: Flat CPI Puts CBRT Nearer Hike Trigger Point)

However, this year’s improvement in household inflation expectations came to a “worrying” halt in November, Cangoz said, a development that may signal fragile anchoring rather than a stable disinflationary path. Indeed, the Monetary Policy Council could soon find themselves at a crossroads, especially if monthly CPI inflation—2.55% in October—fails to improve significantly, he said.

COMMUNICATIONS

Central bank communications continue to highlight the target of 16% inflation by end-2026, with visible policy easing simultaneously aimed at giving the impression that expectations can be lowered, Cangoz said. Yet headline inflation remains elevated, while rapid consumer credit growth weakens the narrative by increasing real exposure to future price rises. (See MNI INTERVIEW: CBRT October Cut 'Premature'-Ex-CBRT's Unalmis)

“Households are no longer reacting to the promise of disinflation but are judging solely by the reality of their purchasing power. If monthly CPI remains above 2%, expectations could de-anchor further, shifting from a 'wait-and-see' phase to a more rapid deterioration driven by backward-looking pricing," he said.

“The crossroads is essentially between 'messaging' and 'experience': weaker lived disinflation will degrade credibility even if messaging remains disciplined. If the target becomes visibly unattainable, expectations could move either in discrete jumps or through slow repricing.”

Political developments are likely to shape volatility in patches, but the underlying adjustment will be gradual, Cangoz said, noting that households are particularly sensitive to wage-setting, rents, education costs, and government-driven prices such as fuel and utilities. (See MNI EM INTERVIEW: Politics Impair CBRT MonPol Impact-CHP's Ozlale)

“If core monthly inflation stabilizes and fiscal-monetary coordination strengthens, expectations could fall below 30%. But a confidence shock, for example, fiscal slippage or heightened political tension, would reinforce stickiness, pushing households toward a 'mark-to-reality' adjustment throughout 2026.”

CREDIT CONDITIONS

Consumer credit, especially credit cards and overdrafts, has continued to expand despite high interest rates, driven by households’ attempts to bridge the gap between income and inflation via "distress borrowing," rather than as a result of a consumption boom.

Policymakers would therefore be well advised to consider macroprudential measures, including raising risk weights and tightening borrower-level limits, to curb credit-fuelled demand without relying solely on headline rates, he said.

Corporate inflation expectations, while generally faster-evolving, more forward-looking and lower than those of households, are nevertheless also sensitive to policy credibility and demand conditions, Cangoz said.

“Besides, the firms with pricing power have the ability to embed past inflation into contracts, which can slow the pass-through [of monetary policy].”

Alongside further rate cuts next year, the CBRT may consider selectively easing credit conditions for the real economy while trying to avoid signalling a broad monetary loosening, especially as the sector becomes more vocal, Cangoz said.

Meaningful shifts in liquidity tools or reserve requirements that would materially change the stance are less likely. But while the Governor has emphasised there is no exchange rate target, given that FX operations and yield curve management ultimately affect real rates, the CBRT will not allow an additional inflationary impulse through the FX channel, he added.