Central Bank President Karahan's Message on Interest Rates and Inflation for 2025

```html

The President of the Central Bank of the Republic of Turkey (CBRT), Fatih Karahan, gave a presentation titled "Monetary Policy and Macroeconomic Outlook" to representatives of the business world and civil society organizations in Eskişehir.

STRICT MONETARY POLICY STANCE WILL CONTINUE

Karahan stated that the determined stance in monetary policy has reduced the main trend of monthly inflation and strengthened the disinflation process through balancing domestic demand, real appreciation of the Turkish lira, and improvement in inflation expectations. He noted that the increasing coordination of fiscal policy would also make significant contributions to this process. "With the measures taken in the first phase, we prevented inflation from rising to higher levels. We established disinflation starting from June 2024. We aim for inflation to decrease to 21% by the end of the year. With the decline in the risk premium, the foreign interest burden has decreased by 7 billion dollars annually," said Karahan, adding that the strict monetary policy stance will continue until a significant and permanent decrease in the main trend of monthly inflation is achieved and inflation expectations converge to the projected forecast range.

MESSAGE OF 'CAUTIOUS APPROACH' IN INTEREST RATE CUTS

In this regard, Karahan expressed that the level of the policy interest rate would be determined in a way that would provide the necessary tightness required by the projected disinflation process, taking into account inflation realizations and expectations. "The Board will make its decisions with an inflation outlook-focused, cautious, and meeting-based approach. If a significant and permanent deterioration in inflation is anticipated, monetary policy tools will be used effectively," he stated. Karahan emphasized that the CBRT has strong communication with the real sector, noting that since 2013, face-to-face meetings have been held regularly with firms from different sectors and scales across the country, mentioning that 500 firm meetings were held in Eskişehir and surrounding provinces in 2024, and a total of 2,321 firm meetings in the last 5 years.

EMPHASIS ON 'GRADUAL DECREASE' IN INFLATION

CBRT President Karahan indicated that qualitative and timely information obtained from firm meetings is used in decision-making processes, stating, "Information is gathered about structural problems as well as conjunctural developments, and the expectations and suggestions communicated are shared with relevant public institutions." He pointed out that price stability is crucial for sustainable growth, purchasing power, and productivity, stating that they will contribute the most to social welfare by ensuring price stability. Karahan stated, "Price stability improves the investment and production environment." He mentioned that inflation would decrease with the balancing of demand, normalization of pricing behavior, and improvement in expectations. Noting that the disinflation process continues, Karahan stated that goods inflation remains low, while the decrease in service inflation has occurred more gradually.

""FOREIGN CURRENCY SUPPLY IS INCREASING, FOREIGN CURRENCY DEMAND IS DECREASING""

Fatih Karahan stated that the balancing of demand has contributed to the decrease in inflation. He noted that firms' pricing behavior in the industrial sector has improved, emphasizing that consumer and firm inflation expectations have also entered a declining trend. Karahan mentioned that reserves have increased by 115 billion dollars since May 2023 to January 2025, stating that the improvement in reserves is domestically sourced.

He indicated that the decrease in the current account deficit has reduced the need for external financing by 48 billion dollars between May 2023 and November 2024, noting that the ratio of the current account deficit to GDP, which was 5% in the second quarter of 2023, has decreased to 0.7% in the third quarter of 2024, and that capital inflows have resumed. Karahan emphasized that they do not have any targets regarding the level of the exchange rate, stating, "Foreign currency supply is increasing, foreign currency demand is decreasing."

DECREASE IN CURRENCY PROTECTED DEPOSITS CONTINUES

While the decrease in Currency Protected Deposits (KKM) continues, Karahan stated that the demand for TL remains strong, saying, "Between August 2023 and January 2025, there was a decrease of 111 billion dollars in KKM balances, while the share of TL deposits increased from 31.6% to 59.3%." He added, "As resource inflows increase, the cost of interest is decreasing. After May 2023, a resource inflow of 53.5 billion dollars occurred," stating that while Turkey's exports are increasing, its imports are decreasing. Karahan reported that between May 2023 and December 2024, exports increased by 7.7 billion dollars, while imports decreased by 32 billion dollars.

Karahan noted that while global trade is gradually recovering, it remains weak, stating, "Europe's goods imports are weak. While Europe's goods imports are slowing, our market share in Europe is increasing." He mentioned that a flat trend has been observed in industrial production since 2022, stating that the support provided to the real sector continues. Karahan noted that the use of rediscount credits has increased, spreading to the general public, especially among SMEs.