07.02.2025 13:51
In a letter sent to the government by the Central Bank of the Republic of Turkey (CBRT), it was stated, "In the upcoming period, the policy interest rate will be determined in a way that ensures the necessary tightness required by the anticipated disinflation process, taking into account inflation developments, the main trend, and expectations."
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The Central Bank sent an "Open Letter" to the Minister of Treasury and Finance, Mehmet Şimşek, on behalf of the government. The letter reminded that according to Article 42 of the Central Bank Law No. 1211, if the inflation target is not achieved, the TCMB must inform the government in writing about the reasons for the deviation from the target and the measures to be taken, and must announce this to the public. The letter indicated that the uncertainty range set around the inflation target for 2024 has significantly exceeded the target. The reasons for the deviation from the target and the measures taken and to be taken to achieve the target were explained in the letter.
The letter included the following statements: "In 2024, the effect of past inflation indexing behavior has come to the forefront in the course of consumer inflation. Although inflation expectations have shown a downward trend throughout the year, they have remained at high levels. In the first half of the year, relatively strong demand conditions contributed to the upward trend in inflation, while from the third quarter of the year, they have affected inflation in a downward direction. In addition, the real appreciation of the Turkish lira has supported the decrease in inflation.
"ANNUAL CONSUMER INFLATION HAS FALLEN TO 44.4 PERCENT"
Commodity prices have generally shown a downward trend after rising until April. The pressures from producer prices have weakened with the decline of producer inflation, which exhibited an increase in the first months of the year. Domestic producer prices increased by 28.5 percent in 2024, becoming a limiting factor for core goods inflation in CPI. As a result of these developments, the annual consumer inflation, which completed 2023 at 64.8 percent, has decreased to 44.4 percent by the end of 2024.
The letter stated that the highest contribution to consumer inflation came from service prices. It was noted that price adjustments in some service sectors were made with a certain delay compared to the actual inflation, and the following was recorded: "These items are one of the reasons for the persistence of inertia in service inflation. In this context, rent and education items have come to the forefront. The actual inflation is of great importance in determining rent increase rates, while the supply-demand conditions in the housing sector have also pushed rent inflation upwards. Thus, rent inflation has differentiated from other service items both in terms of level and inertia. Education services, which generally set prices once a year and have a high tendency to index to actual inflation, have also been another factor pushing inflation upwards during the relevant period of the year.
"INFLATION IN ENERGY AND FOOD ITEMS REMAINED HIGH"
On the other hand, especially in the second half of the year, inflation in some service items sensitive to demand conditions, such as restaurants-hotels, entertainment-culture, and package tours, has remained more moderate. The inflation of goods groups with relatively less past indexing behavior has been lower compared to service inflation. Indeed, core goods inflation, which is relatively sensitive to exchange rates and demand conditions, has remained more moderate, especially for durable consumer goods. However, inflation in the goods group has differentiated with its high level in energy and unprocessed food items.
The letter emphasized that in the energy group, the application of 25 cubic meters of free natural gas usage for residences had a downward effect on inflation in 2023, while the termination of this application has had an upward effect on inflation in 2024. It was stated in the letter that, reflecting this base effect, energy was the only main expenditure group showing an increase in inflation compared to the previous year in 2024, while "In the food group, fresh fruit and vegetable prices, which are highly sensitive to supply conditions and relatively outside the impact area of monetary policy, have increased significantly above seasonal norms in certain months, negatively affecting inflation realizations and expectations."
The letter emphasized that the TCMB determined its monetary policy stance throughout 2024 by considering the main trend of monthly inflation and inflation expectations, in a way that would provide the tightness required by the anticipated disinflation process. In this context, it was reminded that the TCMB raised the policy interest rate, which was 45 percent at the end of 2023, to 50 percent in March 2024, taking into account the deterioration in the inflation outlook. The letter included the following information: "The TCMB maintained a cautious and tight monetary policy stance during the April-November period and kept the policy interest rate at 50 percent. The TCMB reduced the policy interest rate by 250 basis points in December 2024 and January 2025, bringing it to 45 percent. In this decision, the effect of demand conditions, which are at supportive levels for the decrease in inflation, on the main trend of inflation, pricing behaviors, and expectations has come to the forefront. The TCMB has implemented various macroprudential policies in 2024 to support its tight monetary stance and increase the effectiveness of monetary transmission.
Regulations aimed at deposits, such as the increase in the share of Turkish lira deposits within total deposits and the transition from KKM accounts to Turkish lira accounts, have strengthened monetary policy transmission during this period. The transmission mechanism has been supported with regulations aimed at credit growth, and fluctuations in credit demand have been prevented. Additionally, as a simplification step, the securities establishment regulation has been abolished. Steps related to liquidity policy are also ensuring the management of excess Turkish lira liquidity in the system.
"THE DETERMINED STANCE IN MONETARY POLICY REDUCED MONTHLY INFLATION"
The letter stated that the determined stance in monetary policy has reduced the main trend of monthly inflation and clarified the disinflation process through balancing domestic demand, real appreciation of the Turkish lira, and improvement in inflation expectations.
The letter noted that the main objective and priority of the TCMB is to ensure price stability, stating: "Monetary policy will be formulated in line with this objective. The one-week repo auction interest rate will continue to be the policy interest rate. A tight monetary policy stance will be maintained until a permanent decrease in inflation and price stability is achieved. In the upcoming period, the policy interest rate will be determined in a way that provides the tightness required by the anticipated disinflation process, taking into account inflation realizations, the main trend, and expectations. If a significant and permanent deterioration in inflation is anticipated, monetary policy tools will be used effectively. In case of developments in the credit and deposit markets that are outside the anticipated, the monetary transmission mechanism will be supported with additional macroprudential steps."
The letter stated, "Liquidity conditions will be closely monitored, and sterilization tools will continue to be used effectively." Under the mentioned tight monetary policy stance and strong policy coordination, it was emphasized that inflation is expected to gradually converge to the medium-term target of 5 percent, and the following information was provided: "It is anticipated that inflation will likely be 70 percent, with a midpoint of 24 (ranging from 19 to 29) at the end of 2025, a midpoint of 12 (ranging from 6 to 18) at the end of 2026, and a midpoint of 8 (ranging from 2 to 14) at the end of 2027."
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Although inflation expectations and pricing behaviors show a tendency to improve, they continue to pose a risk factor in terms of the disinflation process. The rigidity in service inflation being higher than anticipated is also considered a risk factor. Food and commodity prices, geopolitical developments, and uncertainties regarding the global economy and trade policies keep the risks related to inflation alive.
In the letter, it was stated that the coordination of monetary and fiscal policies is of great importance in the disinflation process, and it was conveyed that the assumptions regarding public policies, which are materialized by the Medium-Term Program (MTP, 2025-2027) that ensures an increase in predictability, are reflected in the Central Bank of the Republic of Turkey's (CBRT) inflation forecasts. The letter stated, "In 2025, it is anticipated that administered/directed prices, along with wage and tax adjustments, will be determined within the framework of MTP targets, and that fiscal policy will be supportive in the fight against inflation." It was also expressed that "On the other hand, in the medium and long term, continuing structural reforms that will reduce rigidity and volatility in inflation and strengthening measures to increase supply capacity will positively contribute to price stability and, consequently, to social welfare. In this context, the CBRT will continue its efforts to analyze structural elements, develop relevant policy proposals, and raise awareness among stakeholders and the public regarding the importance of combating inflation. The developments regarding inflation and monetary policy, as well as our medium-term forecasts, are comprehensively addressed in the '2025 Inflation Report-I' published on our website on February 7, and the '2025 Monetary Policy' document, which explains in more detail the monetary policy to be implemented to achieve the inflation target in the short and medium term, is presented for your information.