Turkish central bank informs gov’t of inflation target deviation, reaffirms tight policy

The Central Bank of the Republic of Türkiye (CBRT) sent an open letter to the Turkish government on Friday, following the presentation of the year’s first inflation report, stating that the tight monetary policy would be maintained in the coming period.

The letter outlined the reasons for the deviation from the previous inflation target which was set in November 2024 from 21% to 24% by the year-end, highlighting that service prices were the biggest contributors to consumer inflation.

Stating that the policy rate will be determined in a manner that ensures the necessary tightness required by the anticipated disinflation process, the Turkish central bank’s letter identified the policies implemented under Treasury and Finance Minister Mehmet Simsek’s program as solutions to address the issue.

Key insights from Turkish central bank on disinflation process

Summarizing the key findings from the first inflation report of the year, the Turkish central bank’s letter provided the following elaborations:

Inflation developments

• Annual consumer inflation fell from 64.8% at the end of 2023 to 44.4% by the end of 2024.

• Service prices were the biggest contributors to inflation. Some service sectors adjusted their prices with a lag based on actual inflation.
• Housing inflation was particularly notable, driven by both past inflation rates and supply-demand conditions in the real estate market. Rent price increases diverged from other service categories in both magnitude and persistence.
• Energy prices rose after the expiration of the free 25 cubic meters of natural gas subsidy.

Monetary policy & interest rate decisions

• The CBRT raised its policy rate to 50% in March 2024 and later cut it to 45% in December 2024 and January 2025, a total reduction of 500 basis points.
• Inflation expectations have improved, but a tight monetary policy will remain in place.

Macroprudential measures

• The CBRT increased the share of Turkish lira deposits, controlled credit growth and removed the securities maintenance requirement.
• Liquidity management efforts are being implemented to control excess Turkish lira liquidity.

Inflation forecasts:

• 2025: 24% (range: 19%-29%)
• 2026: 12% (range: 6%-18%)
• 2027: 8% (range: 2%-14%)

Disinflation process and risks:

• Service inflation rigidity and fluctuations in food and commodity prices remain risks.
• The medium-term program (OVP) will support fiscal policies in combatting inflation.
• Structural reforms will help stabilize prices in the long run.

The CBRT reaffirmed its commitment to price stability, stating that tight monetary policy will continue until inflation shows a sustained and significant decline.

In accordance with Article 42 of Law No. 1211 on the Central Bank, the CBRT is required to submit an open letter to the government if the inflation target is not met, outlining the reasons for the deviation and proposed solutions.