13.03.2025 08:50
The President of the Central Bank of the Republic of Turkey (CBRT), Fatih Karahan, stated that they will not allow demand conditions to disrupt the disinflation process, saying, "We will do whatever it takes to reach our year-end inflation target of 24%."
Karahan visited the Anadolu Agency's (AA) New York Office during his meetings in the USA. Responding to questions regarding current issues, Karahan stated that they believe the recent decline in inflation is due to a decrease in the main trend rather than base effects, influenced by a tight monetary policy.
"IMPROVEMENT IN INFLATION WILL CONTINUE"
Karahan expressed that the improvement in the main trend will be effective in the decline of inflation for the remainder of the year, stating, "We will do whatever it takes to reach our year-end inflation target of 24%." Emphasizing that they will maintain a tight monetary policy stance, Karahan noted that it is extremely important for demand to remain at disinflationary levels for the continuation of the decline in inflation. "We will not allow demand conditions to disrupt the disinflation process," said Karahan, highlighting that the transition from individual currency-protected deposit accounts to the Turkish lira is higher than the transition to foreign currency.
"TIGHT MONETARY POLICY WILL CONTINUE"
TCMB President Karahan indicated that when determining the policy interest rate in the upcoming period, the priority will be to ensure the tightness required by the disinflation path, stating, "We will maintain our tight monetary policy stance until a permanent decrease in inflation and price stability is achieved." The responses Karahan provided to AA reporter's questions on various topics, from combating inflation to monetary and interest policy, from currency-protected deposits to the transition to foreign currency loans, are as follows:
QUESTION: Inflation was high in January, but we saw a decline again in February. How should we interpret inflation data in the upcoming period?
ANSWER: Annual inflation has been declining since its peak in May 2024. A significant part of the decline observed in the early months of the disinflation process was due to the base effect created by developments in the summer of 2023. During this period, we had emphasized monthly price developments to better guide expectations regarding the policy interest rate. In this context, we were looking at the trend of seasonally adjusted core trend indicators over the last few months. At this point, we assess that the decline in inflation is due to a decrease in the main trend influenced by tight monetary policy rather than base effects. The improvement in the main trend will also be effective in the decline of inflation for the remainder of the year. Additionally, there are situations where seasonal adjustment methods fail to capture the changing seasonality post-pandemic. When these factors are combined, we believe it would be healthier to compare core trend indicators with the same month of the previous year.
With this perspective, when we look at the February core trend indicators, we see that the seasonally adjusted B index has decreased from 4.3% in 2024 to 2.8% in 2025, and the C index has dropped from 3.7% to 2.4%. As is known, these two indices rise due to temporary factors outside the influence of monetary policy in January, February, and July. In these months, indicators such as median and SATRIM, which are distribution-dependent, can provide better insights into the course of inflation. Median price increases have fallen from an average of 4.7% in January-February last year to 2.1% in the same period this year. We also observed a similar decline in SATRIM. When we put all this together, we see that the monthly core trend has decreased by one-third in the B and C indicators compared to last year, and by half in median and SATRIM.
"WE WILL DO WHATEVER IT TAKES TO REACH OUR TARGET"
It is also beneficial to look at inflation on a sub-item basis to understand the dynamics of inflation. In the context of annual inflation developments, we assess that goods inflation remains low, while the service side, although beginning to break rigidity, is still at a high level. Here, rent and education items, which have a high tendency for time-dependent price setting and indexing to past inflation, stand out. Annual rent inflation was 121% in February last year, while it has come down to 97% this year. In this item, both the level is high and disinflation is slow. We observe a similarly limited improvement in education.
"WE WILL DO WHATEVER IS NECESSARY"
On the other hand, we see a significant improvement in more sensitive items to monetary policy within the service group. For example, restaurant and hotel inflation has decreased from 95% to 46%. This actually shows that monetary tightness is effective in reducing this type of service inflation. We will do whatever it takes to reach our year-end inflation target of 24%. By maintaining our tight monetary policy stance, we will continue to reduce inflation in line with our year-end targets.
QUESTION: In the fourth quarter of last year, demand was strong. What does this data mean for the inflation outlook?
ANSWER: To understand demand conditions before the national income data for the fourth quarter was announced, we were tracking data such as card spending, credit growth, and retail sales. These data indicated that demand was somewhat resilient but at disinflationary levels in the fourth quarter. The relevant growth data announced at the end of February showed that demand was stronger than we had anticipated. Indeed, we emphasized this in the last MPC decision text. It is extremely important for demand to remain at disinflationary levels for the continuation of the decline in inflation. In this context, when we look at the announced data for the first quarter, we see that retail sales maintained their strength in January, while the volumes of vehicle trade and wholesale trade have declined. Credit growth is more moderate compared to the fourth quarter. Card spending data indicate a weaker trend in January and February.
Therefore, while the current demand indicators for the first quarter contain some uncertainty, they imply that consumer spending has been more moderate following the increase observed in the previous quarter. We will continue to evaluate this outlook as the demand indicators for the first quarter accumulate. We will not allow demand conditions to disrupt the disinflation process.
QUESTION: We saw an increase in the current account deficit in January. Your monetary policy texts continue to emphasize the real appreciation of the Turkish lira. Can you evaluate the outlook for real appreciation of the Turkish lira and the current account deficit for 2025?
ANSWER: When we look at the developments in the current balance, we see that the current account deficit as a percentage of national income has decreased from 5% before the tightening to 0.8% by the end of 2024. Considering that the average ratio of the current account deficit to national income over the last 20 years has been around 3.7%, the 0.8% ratio is quite low compared to historical averages. Recent data indicate a slight increase in the current account deficit in 2025.
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When we look at the factors that could affect the current account balance in 2025, uncertainties regarding global trade highlight the downward risks stemming from exports. We have also observed a high trend in the import of consumer goods recently. Despite this, we expect that the ratio of the current account deficit to national income in 2025 will be higher than in 2024, but significantly below long-term averages.
"WE DO NOT HAVE A TARGET REGARDING EXCHANGE RATES"
When it comes to real appreciation, our monetary policy does not have a design focused on real appreciation of the Turkish lira. We do not have any targets regarding the level or change of exchange rates. Our determined stance in monetary policy brings about an increase in interest towards the Turkish lira. As a natural result of this interest, while our reserves are increasing, there is also real appreciation in the exchange rate.
To evaluate the near-term outlook, we can look at the preferences of domestic residents. Recently, there has been a decrease in Turkish lira deposit interest rates and an increase in withholding tax rates for Turkish lira deposits and money market funds. We have also taken steps to accelerate the exit from "Currency Protected Deposits" (KKM). In December 2024, we made changes that reduced the returns of KKM accounts. In January, we eliminated long-term accounts, and finally, in February, we ended the account opening and renewal processes for legal entities in KKM. Despite all these developments, we see that interest in the Turkish lira continues. Looking at individual KKM accounts, in January, the rate of conversion to foreign currency was 10%, while the rate of staying in Turkish lira was around 25%. In February, limited changes were observed in these rates. The conversion rate to foreign currency was 12%, while the rate of staying in Turkish lira was 23%. These developments indicate that the transition from KKM accounts maturing to Turkish lira is higher than the transition to foreign currency.
"WE WILL CONTINUE OUR TIGHT MONETARY POLICY STANCE"
I would like to emphasize once again that in the upcoming period, our priority in determining the policy interest rate will be to ensure the tightness required by the disinflation path. We will maintain our tight monetary policy stance until a permanent decrease in inflation and price stability is achieved. Our determined stance in monetary policy will support interest in the Turkish lira.
QUESTION: You had reduced the growth limit for foreign currency loans to 1% in January. With a new regulation at the beginning of March, this limit was reduced to 0.5%, and the scope of exceptions was narrowed. What is the reason for this decision? Has the desired slowdown in foreign currency loans been achieved with the new regulation?
ANSWER: Tight monetary policy is tightening the Turkish lira credit market as we intended, but due to the stable course of the exchange rate, foreign currency (FX) loans are becoming relatively less costly. Indeed, the real sector has provided approximately 50 billion dollars in financing through this method since the end of 2023. This strong credit growth poses risks related to monetary expansion and the foreign currency position of the real sector. In addition, the increase in FX loans raises the demand for foreign currency liquidity in the financial system. We have seen that this situation has recently led to an increase in Foreign Currency Deposit Account (DTH) interest rates and increased the risk of deposit dollarization. In January, we had already narrowed the FX loan growth limit somewhat, but we observed that the increase in FX loans continued in the first quarter, and this increase largely came from items exempted from growth limits. In line with these observations, we narrowed both the areas of exemption and the growth limit for FX loans.
Since there is still limited data flow after the regulation, it is early to say anything. We evaluate that these changes will strengthen the monetary transmission mechanism and reduce the risks to macro-financial stability.
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