Turkish central bank holds inflation forecast at 38%

Central Bank of the Republic of Türkiye (CBRT) President Fatih Karahan released the third quarter 2024 Inflation Report, maintaining the year-end inflation forecast at 38%. Despite the challenging economic environment, the central bank’s stance remains focused on controlling inflation through tight monetary policies.

Highlights from Karahan’s remarks:

• Inflation forecast unchanged: Year-end inflation estimate stays at 38%, with projections for 2025 and 2026 remaining at 14% and 9%, respectively.
• Current economic impact: Inflation saw a temporary increase in July due to transient effects. However, the underlying trend indicates a slow but steady disinflation process.
• Monetary policy stance: The central bank will continue its strict monetary policy to support market stabilization and manage inflationary expectations. Recent measures include increased reserve requirements and macroprudential policies.
• External and internal factors: The report notes a decrease in the current account deficit and a balanced improvement in external trade. Domestic demand is expected to stabilize, and foreign exchange reserves have seen a notable increase.
• Credit and inflation trends: There is a notable slowdown in consumer credit growth, and inflation expectations have improved, contributing to a more stable economic outlook.

Domestic macroeconomic developments:

• Net exports have positively contributed to annual growth for the first time since the third quarter of 2022, leading to a more balanced composition of growth from the demand side. However, recent data shows a slowdown in external demand.
• Credit card spending remains high but has stabilized recently. We observe that essential expenditures like food, clothing, and dining have remained steady, while discretionary spending on items like jewelry, electronics, and cars has decreased.
• Industrial production fell in the second quarter according to May data. Our tight monetary policy will continue to balance domestic demand. A significant component of the disinflation process will be the reduction in the current account deficit to negative levels.
• We continue to see improvements in the external trade balance in line with domestic demand stabilization. We expect the current account deficit to decrease to around $20 billion by July, with a ratio to gross domestic product dropping below 2.5%.
• Historically, periods of monetary tightening lead to improvements in the current account balance. We anticipate that this positive trend will continue.

Current inflation status:

• The disinflation process has started as expected. The main trend of inflation is slowing, although there was a temporary increase in July due to short-term factors.
• Leading indicators suggest a decrease in rent inflation. Recent months have seen significant improvements in inflation and exchange rate expectations due to our policies.
• Credit demand accelerated in the first quarter of 2024, leading to increased consumer credit growth. However, growth in consumer loans has weakened since the second quarter.

Second quarter recap:

• Türkiye achieved a 5.7% growth rate in the first quarter of this year. The GDP at current prices for the first quarter was ₺8.82 trillion (approximately $285.57 billion).
• August inflation data will be released on Sept. 3. Consumer prices rose by 3.23% in July monthly, and producer prices increased by 1.94%. Annual inflation rates were 61.78% for consumer prices and 41.37% for producer prices.