What kind of policy mix?

Kub lay Ozturk, econom st, Deutsche Bank

The Central Bank of Turkey rev sed up ts CPI prof le n ts November nflat on report and now expects headl ne nflat on to reach 7% through end-2018. The Treasury meanwh le announced the F nanc ng Program for 2018, wh ch foresees the domest c rollover rat o at 110% after 128% th s year. In our v ew, both targets may prove d ff cult to ach eve. We are probably w tness ng one of the most cr t cal moments for tense nteract on between monetary and f scal pol cy. The f scal s de s n need of some consol dat on to ensure that bond y elds do not go up further due to over-supply ssues. Yet, the nflat on and FX outlook does not prov de any major room for the bank to compensate for a t ghter f scal stance, part cularly g ven the author t es’ ncl nat on to keep growth rates at compet t ve levels. On the rates outlook, tak ng the bank’s well-known b as for t me- ncons stent pol cy, we st ll ma nta n our call for a steady effect ve rate rema n ng close to current levels n the com ng months, followed by some eas ng n H1

2018 when headl ne nflat on d splays some decelerat on. R sks on our call, however, are t lted toward the ups de for two reasons. F rstly, f the ongo ng bout of weakness n the fore gn exchange market proves to be more longlast ng than expected, the much-ant c pated decl ne n headl ne CPI could be shorter and shallower than currently ant c pated, g v ng the bank no organ c room to ease off n 2018. Secondly, the latest headl nes suggest the author t es are ncl ned to support the economy via f scal and cred t mechan sms aga n n 2018, h nt ng that monetary pol cy may need to stay t ght to keep TRY n check. A h gh nterest-rate env ronment s l kely to stay w th us for some t me. (Nov. 1)