Turkish central bank head Karahan confirms continued tight monetary policy stance

Fatih Karahan, governor of the Central Bank of the Republic of Türkiye (CBRT), said Wednesday that the central bank will maintain a tight monetary policy stance until a permanent decrease in inflation and price stability is achieved.

Speaking at the German-Turkish Chamber of Commerce and Industry (AHK) Economy meeting, Karahan emphasized that the economic and trade relations between Germany and Türkiye contribute to mutual prosperity and growth.

Karahan acknowledged recent developments in the markets that caused value losses in financial assets. “We took swift action to ensure that the market volatility is temporary and its effects on the economy are short-term,” he said.

Proactive measures to limit market volatility

Karahan outlined the proactive measures the CBRT has taken, including staying within market rules and using its tools to maintain stable market functioning. “We keep our two-way communication channels open at all times,” he said, underscoring the importance of effective coordination in times of market uncertainty.

The CBRT governor also reaffirmed the central bank’s broad and powerful toolkit, stating, “We resolutely maintain our tight monetary policy stance to ensure price stability, which is our main objective.”

Karahan reported that economic activity recovered in the last quarter of 2024, with private consumption increasing due to demand brought forward by campaigns and upcoming wage updates. He also noted that net exports played a positive role in growth during the year, with industrial production showing signs of recovery.

He pointed out that the Services Production Index showed a moderate recovery in the last quarter of 2024, driven by sectors less reliant on consumer demand, such as professional, scientific, and technical activities, as well as information and communication.

Disinflation process underway

Karahan highlighted that the disinflation process that began in June 2024 continues, with consumer inflation falling to 39.1% in February. He acknowledged that while the underlying trend had risen in the first quarter of the year, it showed significant slowdown in February.

The governor noted that factors such as Ramadan’s impact on food prices and the reflection of recent developments in financial markets could increase inflation risks, particularly in April. However, he reassured that the CBRT would continue to monitor demand indicators closely.

Karahan emphasized that Türkiye’s export strength persisted despite weak foreign demand. He noted that Türkiye’s export share had increased relative to the EU’s weak import activity, indicating that exporters maintained their competitiveness.

He also addressed concerns over a slight increase in the current account deficit in 2025, pointing to uncertainties in global trade and consumer goods imports. Despite this, he expects the current account deficit to remain significantly below long-term averages in 2025.

Karahan explained that measures were taken to limit excessive volatility in the markets, including increasing the Central Bank’s overnight lending rate from 44% to 46%. The CBRT also kept its policy rate at 42.5% and suspended one-week repo auctions temporarily. Additionally, steps were taken to ensure liquidity in the market by extending TL deposit auctions and increasing the diversity of liquidity instruments.

Foreign currency liquidity measures

The governor also noted the start of TL-settled forward foreign exchange sales transactions at the CBRT. These transactions, known as NDF, are designed to protect companies from exchange rate risk and support the stability of the foreign exchange market.

Karahan reaffirmed that the CBRT will continue using all available monetary policy tools decisively to maintain the effective functioning of financial markets. “We will determine our steps with a proactive approach to limit the macroeconomic effects of market volatility,” he said, assuring that the fundamental dynamics of Türkiye’s economy remain strong.

“We will maintain our tight monetary policy stance until we achieve a permanent fall in inflation and price stability,” he concluded. “In case of a significant and permanent deterioration in inflation, we will tighten our monetary policy stance.”