Turkiye’s central bank Governor Fatih Karahan struck an optimistic note on the inflation outlook following worse-than-expected data and market turmoil, suggesting investors may have been too hasty in reducing their forecasts for interest-rate cuts.An unexpected court order against the main opposition party on Tuesday which triggered a broad selloff in Turkish assets was followed by the release of higher-than-expected August inflation data the next morning. The combination had Wall Street banks swiftly redrawing their predictions for a new rate-cutting cycle, anticipating a less severe reduction when policymakers meet on September 11.But in an interview with Bloomberg News on Thursday, Karahan said the breakdown of August’s inflation numbers and second-quarter growth showed that demand-driven price pressures are easing.“Though headline GDP growth was higher than forecasts, the components of the GDP data showed that demand conditions continue to support disinflation,” he said in Istanbul. While overall quarterly growth was an above-forecast 1.6%, Karahan highlighted that private consumption has come in negative for two consecutive quarters.Similarly, while August inflation which slowed to 33% from 33.5% the prior month was above expectations, Karahan emphasised the main indicators of the underlying trend offered “a healthier assessment.” Those show that price rises are continuing to ease, he said, while adding that the central bank is keeping a close eye on the impact of increases in rent and education on inflation expectations.The BIST-100 Index and banking stocks were slightly up on Friday morning at 10.22am. The lira was trading 0.2% lower against the US dollar at 41.25.The central bank reduced rates by more than anticipated in July, to 43% from 46%, the first cut in four months, and signalled at the time that more was to come.But a court order to remove the Istanbul administration of Turkiye’s main opposition Republican People’s Party, or CHP, unnerved investors. That ruling which precedes a number of other legal decisions related to the opposition coincided with the disappointing economic reports, causing Wall Street banks to predict a slower pace of interest-rate cuts.Asked whether the central bank’s views on inflation are influenced by the overall uncertainty, Karahan said: “We haven’t allowed for the deterioration of inflation expectations nor for demand to disrupt disinflation and we won’t allow it.” “We want to preserve the gains we’ve made in reserves, the current-account balance and other important areas like dollarisation,” he added.The central bank last month fine-tuned its guidance for inflation, maintaining a year-end target of 24% while at the same time issuing a projection of where it anticipates the figure to ultimately end up.That’s likely to be in the range of 25% to 29%, the bank said.The official targets will be used to “determine the tightness of monetary policy in the current and near-term period,” Karahan said.“Because monetary mechanism takes some time, in the short run estimates could diverge from the interim targets,” he said. “There might be times when monetary policy can’t immediately react. For example, these could include factors that fall outside the relative sphere of influence of monetary policy, developments that have emerged very recently relative to the control horizon, and situations where the impact on the inflation outlook is uncertain.”
