The breakdown of Türkiye’s August inflation and second-quarter growth data indicates that price increases continued to ease, while underlying demand conditions remain supportive of disinflation, the country’s central bank governor said on Friday.

Official data this week showed the annual trend in Türkiye’s inflation remains downward, although the CPI softened less than expected to 32.95% last month, while it rose 2.04% on a monthly basis.

That followed data that showed the economy grew by a stronger-than-expected 4.8% year-over-year in the April-June period, despite a prolonged monetary tightening effort.

Analysts say both sets of data could prompt the Central Bank of the Republic of Türkiye (CBRT) to slow the pace of its interest rate cuts when its Monetary Policy Committee (MPC) convenes next week.

CBRT Governor Fatih Karahan on Friday said that although headline growth in the second quarter exceeded forecasts, the composition of GDP suggests that domestic demand is not undermining the disinflation process.

Speaking to Bloomberg News, Karahan also flagged that improvements in housing and education inflation were weaker than expected, stressing that the CBRT takes their implications for inflation expectations seriously.

The annual price growth in housing and utilities slowed to 53.27% in August from 62.01% in July. Prices for education surged 60.9%, according to the data.

Monthly growth was largely driven by the food group, affected by frost damage and drought, accounting for about one-third of the increase. Food and non-alcoholic beverages prices rose 3.02% on a monthly basis, while annual growth stood at 33.28%.

Asked about whether recent political developments at home could pose risks to the inflation outlook, Karahan said non-economic factors can spill over into financial markets but stressed policymakers are reacting to their potential effects on the inflation outlook.

“We haven’t allowed for the deterioration of inflation expectations nor for demand to disrupt disinflation and we won’t allow it,” he said.

Turkish stocks and bonds fell sharply after Tuesday’s court ruling to suspend Istanbul provincial leadership of the main opposition Republican People’s Party (CHP) over alleged irregularities in a 2023 provincial congress.

That followed a market turbulence in March after detention of Istanbul Mayor Ekrem Imamoğlu, who was jailed pending trial over graft charges.

Karahan underlined that the CBRT seeks to preserve gains in reserves, the current account balance and de-dollarization achieved so far, calling them macro-financially critical.

Economists have begun revising down their expectations for next week’s interest rate cut after the stronger-than-expected growth and inflation figures.

Three Wall Street heavyweights, Goldman Sachs, JPMorgan and Morgan Stanley, all expect the CBRT to lower its one-week repo rate by 200 basis points, following a 300-point reduction at its last meeting in July to 43%.

Their earlier projections ranged between 300 and 350 basis points.

Economists were expecting the bank to continue its easing cycle and cut rates to 36% by year’s end.

Annual inflation has dipped from as high as 75% last year and the CBRT estimates it will fall to about 24% by the end of the year, with a forecast range of 25%-29%.

Policymakers are aiming to cut it to 16% by the end of next year and 9% by end-2027, according to the central bank estimates.

Karahan stressed that the CBRT’s monetary policy stance will continue to be guided by intermediate targets, which will serve as benchmarks for adjusting the level of policy tightness.

If developments within the scope of monetary policy’s influence and control horizon hinder the achievement of interim goals, Karahan stated that they would adjust the tightness to ensure inflation converges toward the interim targets.

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