Turkish central bank committed to tight policy to curb inflation: Governor Karahan

Turkish central bank Governor Fatih Karahan reiterated on Thursday the institution’s strong stance on meeting the year-end inflation target of 24%, emphasizing that all necessary steps would be taken to achieve this goal.

Karahan attended the Foreign Policy Association (FPA) awards ceremony in New York, where he was honored with the FPA Medal in recognition of the Central Bank of the Republic of Türkiye’s (CBRT) efforts to enhance relations with international institutions and global central banks, as well as to increase public awareness.

“This award is not just a personal achievement but a symbol of the collective success of everyone working tirelessly to improve responsible economic governance,” Karahan said in his speech.

Addressing Türkiye’s disinflation process, he highlighted the contributions of other state institutions in coordinating economic policies.

‘Goods inflation slows, services inflation persists’

Karahan’s visit to New York included meetings with investment firms and discussions with the New York Federal Reserve. Following his meetings, he also visited Anadolu Agency’s New York office for an interview.

During an interview with Anadolu Agency correspondents, he emphasized that inflation’s decline is primarily driven by a decrease in the underlying trend, supported by tight monetary policy, rather than base effects.

He noted that this improvement in the underlying trend would remain a key factor throughout the year, reaffirming the central bank’s commitment to its inflation target.

“To better understand inflation dynamics, it is also useful to look at inflation by sub-items,” Karahan said, highlighting that while annual goods inflation remains low, services inflation in Türkiye continues to be high despite some rigidities beginning to ease. He pointed to rent and education as notable examples, as both sectors are influenced by time-dependent pricing and backward indexation.

In February, Türkiye’s annual inflation fell to 39.05%, beating expectations of 39.9%, driven by cooling food prices.

Karahan noted that annual rent inflation, which stood at 121% in February last year, had declined to 97% this year, indicating that while rent inflation remains high, disinflation has been slow. Similarly, he observed only limited improvement in education prices, suggesting continued inflationary pressures in this category.

Meanwhile, he highlighted a notable improvement in services more sensitive to monetary policy, particularly in the restaurant and hotel sector, where inflation dropped from 95% to 46%. This, he said, demonstrates the effectiveness of monetary tightening in curbing inflation in certain service sectors.

Stressing the importance of maintaining a tight monetary policy stance, Karahan underscored the necessity of keeping demand at disinflationary levels to ensure further progress in reducing inflation.

“The latest demand indicators suggest a milder course following the rise in the fourth quarter,” he said, adding, “We will ensure that demand conditions do not impair the disinflation process.”

‘No exchange rate targets’

On the Turkish economy’s external balance, Karahan noted that recent data reflect a significant improvement, with the current account deficit-to-gross domestic product (GDP) ratio dropping from 5% before monetary tightening to 0.8% at the end of 2024. He emphasized that this figure is well below the two-decade average of 3.7%, though a slight increase in the deficit is expected in 2025.

Discussing factors influencing the current account balance, he pointed to downside risks in exports due to global trade uncertainties and the persistently high level of consumer goods imports. While acknowledging that the deficit-to-GDP ratio may rise in 2025, he stressed that it is still projected to remain significantly below long-term averages.

Regarding exchange rate dynamics, Karahan underlined that monetary policy is not designed to target real appreciation. “We do not have any targets for exchange rate levels or changes,” he stated. However, he noted that increased interest in the Turkish lira, driven by the central bank’s firm monetary stance, has naturally contributed to higher reserves and real appreciation.

Discussing financial preferences and policy adjustments, Karahan recalled recent steps taken to phase out foreign exchange (FX)-protected deposit accounts, including lowering returns in December, terminating long-term accounts in January, and halting new openings and renewals for legal entities in February. Despite these measures, he noted continued demand for the Turkish lira, highlighting that in February, 23% of maturing FX-protected accounts were converted into lira deposits, compared to 12% into FX deposits.

The Turkish central bank had pursued an interest rate cut cycle for the third consecutive meeting in March, reducing the policy rate by another 250 basis points to 42.5%.

Looking ahead, Karahan clarified that the central bank’s priority will be to set the policy rate at a level that ensures the necessary tightness for the projected disinflation path, reaffirming the bank’s unwavering stance on monetary policy.