Turkey's economic team reshuffled yet again

The latest reshuffle in the Turkish central bank clouds the outlook a bit. Still, it does not point to a real threat of abandoning more restrictive, orthodox policies to fight inflation and restore macroeconomic stability in the short term. The CBT's independence and determination to stick to a more orthodox stance will be tested, but rather in the second half of the year, when inflation fails to decline rapidly.

Firstly, in contrast to numerous occasions in the past, President Recep Tayyip Erdoğan did not dismiss Hafize Erkan, who most probably resigned because of media allegations that the governor's family interfered in the central bank's operations. Controversy around Erkan did concern monetary policy. What is more, the second pillar of Turkey's economic team, Finance Minister Mehmet Simsek, not only remains in his position but also promises to carry on with market reforms. Finally, Erkan was replaced by the deputy governor, Fatih Karahan, and the central bank declared last month that the hiking cycle was over.

Nevertheless, the increase in the one-week repo rate from 8.5 to 45 pct. since the May elections may not be enough to decisively tame Turkey's long-standing inflation problem. The root cause of inflationary pressures, i.e. a vicious mix of loose monetary policy, deep negative real interest rates and persistent lira weakness, remains in place. Further fiscal stimulus ahead of the March voting poses a clear upside risk to the central bank's inflation outlook, which assumes the yearly inflation rate will decline rapidly to 36 pct by the end of 2024.

Fintech Conotoxia expects price pressures to abate substantially slower in the year's second half. Another round of fiscal policy loosening resulting from a political calendar remains a key threat to central banks' overly optimistic inflation outlook and might result in postponing the first cuts.