Goldman Sachs: Fund crisis could shave 0.7 points off growth

Goldman Sachs, in its November 12 Turkey assessment report, said the messages in the Central Bank of the Republic of Turkey's (CBRT) latest Inflation Report could pave the way for a rate cut in December, but that its own base case is for the policy rate to be held steady. According to the report, the bank examined CBRT Governor Fatih Karahan's assessments regarding the upward revisions to inflation forecasts and his monetary policy messages.

According to the report, Karahan stated that the Iran war and the uncertainties tied to it lay behind the updates to the inflation forecasts. It was conveyed that uncertainties over fiscal policy and the duration of the war were instrumental in postponing the forecast changes for 2026 and beyond during the previous Inflation Report period. Karahan said the updates in the latest report were not merely a reaction to recent developments but rested on a broader assessment. Goldman Sachs reported that Karahan drew attention to the marked slowdown in core inflation and domestic demand, but said the upward revisions to the forecasts did not mean a loosening in monetary policy conditions.

The bank assessed that greater emphasis on these indicators in the presentations by the CBRT Governor and the Monetary Policy Committee members could raise the likelihood of a rate cut in December. On dollarization, Karahan stated that foreign exchange demand is not tied solely to interest rates and that the withholding tax was also a factor in this process. He said that the improvement in inflation expectations and confidence in the CBRT have so far limited the shift into dollarization despite the decline in yields. Goldman Sachs noted that the CBRT could resort to macroprudential tools, including tax regulations, in order to keep foreign exchange demand under control alongside rate cuts.

The main heading on which Goldman Sachs and the CBRT diverge was the impact of the fund crisis on financial conditions and economic activity. While the CBRT shared the assessment that the impact is limited, the bank argued that this impact is stronger. According to the bank's quantity-based financial conditions index, only in September was there 100 basis points of tightening due to the effect of the fund crisis, and the index returned to the tightest level of the current cycle seen in 2024 before the easing process in monetary policy began. The bank calculated that this tightening in financial conditions could create a 0.7-point downward effect on economic growth in the coming quarters.

Goldman Sachs pointed out that credit growth continued to slow despite the macroprudential easing steps and the start of the rate cut process. The bank welcomed the Central Bank's devoting more space to the current account in the latest Inflation Report compared with previous reports; however, it noted that reserve losses stemming from the financial account or the balance of payments, which it considers more important for the sustainability of the economic program, were not addressed in the report.