27.11.2025 08:25
The President of the Central Bank of the Republic of Turkey, Fatih Karahan, stated, "Our primary goal is to bring inflation down to single digits, and then stabilize it at 5 percent. Inflation is actually like a virus. When it stays in the body for a long time, it becomes harder to get rid of; it may take a little longer. But we are applying the right prescription."
TCMB President Fatih Karahan answered questions from İş Portföy General Manager Nilüfer Sezgin and CNN Türk Ankara Editor Gülşen Coşkun, moderated by NTV Ankara Representative Ahmet Ergen, regarding monetary policy and the economic outlook at the Istanbul Financial Center.
STRIKING STATEMENTS FROM FATIH KARAHAN
Karahan's statements are as follows: "As the Central Bank, we had three primary objectives in terms of macro-financial stability. The first is to correct our reserve position, which reached negative 60 billion dollars. The second is to reduce the KKM balance, which exceeded 140 billion dollars. The third and most important is to first establish disinflation, then reduce inflation to single digits and maintain it there to achieve price stability. In this regard, we first established a tight monetary policy. The effects of the tight monetary policy were first seen in reserves; this effect emerged relatively quickly. We have recorded an increase of over 80 billion dollars in our gross reserves so far. When we look at net reserves, that is, after deducting our liabilities, the improvement is even greater. Here, there is an improvement of nearly 120 billion dollars, exceeding 115 billion dollars. Therefore, these are quite significant gains. Additionally, the nature of the reserve increase is also important. A large part of this increase was domestic. With the restoration of trust in the Turkish lira, our citizens exchanged their foreign currencies, and by accumulating these foreign currencies in our reserves, we corrected our reserve position.
"WE HAVE MADE GREAT PROGRESS IN CURRENCY PROTECTED DEPOSITS"
We have also made great progress in KKM, our second priority. As I mentioned, two years ago, there was a balance exceeding approximately 140 billion dollars. We are now below 1 billion dollars; in fact, recent data shows around 600 million dollars. Our third and most important goal is price stability. Why? Because high inflation leads to a loss of welfare for our citizens. Additionally, the main reason for the deterioration of our reserve position and the significant increase in the KKM balance is the high inflation and the solidification of expectations that prices will rise rapidly. This is a long-term process. We have made considerable progress, but our goal is primarily to reduce inflation to single digits, and then stabilize it at around 5 percent. So far, the policy effect has been very clear. We first limited inflation to 75 percent. At that time, inflation could have gone into triple digits. With the measures we took, we ensured that inflation remained at least at 75 percent. Since then, inflation has continued to decline and is currently below 33 percent. The latest data shows 32.9 percent.
"WE WILL DO OUR BEST TO ENSURE INFLATION FALLS IN LINE WITH OUR TARGETS"
During this process, of course, there were three mechanisms that supported us and contributed to the decline in inflation. These are important because they will give us insight into how inflation will decrease in the future. One of them is demand balancing. What do we mean by this? If you go back two years, there was an economy where private consumption was very strong, and investments were relatively weaker. It was a growth driven by imports. Therefore, it was not a very sustainable growth in terms of sustainability. At the point we have reached now, we see that this balance of consumption, private consumption, investment, and imports has come to a much healthier level, thus making it much more sustainable. This balancing, this normalization has somewhat alleviated the pressures on prices. The second factor is the real appreciation of the Turkish lira due to exchange rates. What does real appreciation mean? It means that the increases in the exchange rate are below inflation. The third source is actually inflation expectations.
Now, looking at these three sources, we believe that we have received very clear and strong support from the first two so far. That is, due to demand balancing and real appreciation of the Turkish lira. We want to receive more support from expectations in the upcoming period. In summary, the current demand conditions are compatible with disinflation. There has been a slowdown in disinflation recently, but even so, with the measures we will take and the steps we will take, we will do our best to ensure that inflation falls in line with our targets by recalibrating the tightness of monetary policy.
"INFLATION IS LIKE A VIRUS"
Inflation is actually like a virus. When it stays in the body for a long time, it becomes harder to get rid of; it may take a little longer. But we are applying the right prescription. So far, we have achieved quite positive results. I have no doubt that we will reach the ultimate goal. However, the time it takes for the prescription to take effect can vary from body to body. When we look at our country's previous disinflation journey, during the early 2000s, results were obtained much faster. However, the conjuncture at that time is quite different from the current conjuncture. Therefore, it is normal for the duration to differ. But we believe that we will achieve results because we are applying the right prescription. After the September data, there was quite a bit of pessimism because the data came in above market expectations. To understand that period, it was necessary to look at the details of the September data. Which items did the deviation come from? Do these items indicate that the deviation is temporary or will it be permanent? This distinction was important.
When we look at the September data, we see that a large part of the deviation is food-related. This year, we experienced agricultural frost first, followed by severe drought. Due to the drought, especially grain-related prices increased significantly in September. This is the first and largest source of the deviation. Another factor is education fees. This is a bit more technical. The new year's university fees enter the index in September. Therefore, seasonally, education inflation is high in September. Last year, TÜİK spread this over August and September; this year, however, it was measured in a single month. For this reason, we saw a higher reading. In summary, these two items explained a large portion of the deviation. It was natural to expect the deviation to be temporary due to technical reasons. However, we know this in our country: If inflation is high for one or two consecutive months, it can pull up the data for the following periods. Therefore, the October and November data were important to understand whether this would be temporary or permanent.
"INCREASES IN THE EXCHANGE RATE CHANNEL HAVE SLOWED DOWN RECENTLY"
The October data came in below expectations and created an opinion that the deviation could be temporary. Our preliminary data for November also similarly shows that disinflation is being sustained in a healthy manner. We believe we will see better data both in the headline and in the details. We talk month by month, but sometimes it is necessary to step back a bit and look at the big picture. Even in months when headline inflation comes in poorly, there are positive developments in the sub-items. One of these is rent inflation. Rent inflation has been high for a long time and shows rigidity; its decline is slower. However, the rent inflation, which has been above 4 percent on a monthly basis for a long time, has fallen below 4 percent; in the latest data, it is approximately 3.5 percent.
This is quite important. A part of the decline in inflation in the upcoming period will come from rental inflation. Similarly, service inflation has decreased from around 70% to 44% over the past year. The continuation of this improvement is also very important for disinflation. I mentioned the exchange rate, demand, and inflation expectations that determine the medium term. In the exchange rate channel, increases have slowed down recently; this mainly affects core goods inflation.
The annual inflation of core goods is already around 20%, which is quite low. Due to the low increase in the exchange rate, we expect this to decrease further. I mentioned that the demand channel is working. I want to give a few numbers here because the data is quite striking: Two years ago, the annual increase in durable goods was around 20%. In July 2023, the annual increase in car sales was 120%. There was a significant demand explosion. In such an environment, prices were also rising rapidly. Today, however, we see that this excessive momentum has disappeared. Private consumption has been decreasing for two quarters; it is not even flat, it is directly decreasing. Imports of consumer goods are falling. The service production index is stable. Overall, there is a serious balancing, which weakens the demand-side pressures on prices. We believe that it has supported disinflation until this period and will continue to do so in the upcoming period. If I want to emphasize again, we need to receive a bit more support from the expectations channel in the upcoming period. In summary, both our short-term indicators and the main determinants of inflation in the medium term show us that disinflation is continuing.
"AS INFLATION FALLS, THE PERCEIVED INFLATION WILL ALSO DECREASE"
I want to start with the distinction between measured inflation and perceived inflation. These two concepts are often used interchangeably, but they do not actually measure the same thing. It is useful to clarify this distinction. The CPI, which we call measured inflation, measures the increase in the prices of the average consumption basket in the country. How is it done? To simplify: Our statistical institution collects the prices of very different products and services. It places them in the index with certain weights, and we call the change in this index 'measured inflation'. The weights are determined according to average spending patterns. For example, food expenditures account for about 25% of the basket. Goods account for about 30%. Services also account for about 30%. Therefore, measured inflation does not reflect the inflation of each household one-to-one; it is measured according to an average household. If a household's share of food expenditures in total expenditures is higher, its perceived inflation may be higher. Or if the share of goods expenditures is high and goods inflation is lower, the inflation experienced by that household may be lower. This is the first difference.
So why does perceived inflation vary? Because the price of each product does not increase at the same rate. When we say 'inflation is 32.9%', it does not mean that each product has increased by 32.9% in the last 12 months. In some items, inflation is lower, in others, it is higher. For example: The annual inflation in core goods has decreased to an average of around 20%. In service items, it is at 44%. The items that determine perceived inflation are not core goods, but rather: More frequently made expenditures: First and foremost, food. We buy food every day or every week. Therefore, price changes are felt immediately. Items with a high share in the budget: The first of these is rent. When there is a high increase in rent, its effect is felt much more directly. Inflation is relatively higher in these two items. Especially, rental inflation is currently around 66%. Therefore, it is normal for perceived inflation to be higher than measured inflation.
Food had also been below the headline for a period, but it has risen above it again in the last few months. This difference between perceived and measured inflation is not unique to Turkey. Studies conducted on the European Central Bank, the USA, and many developing countries show the same result: Perceived inflation is generally higher than measured inflation. The item that usually creates the biggest difference is housing/rent. As inflation decreases, perceived inflation will also gradually decrease over time. Briefly touching on household expectations: What is measured is not the inflation expectation for the next 12 months; it is more about the reflection of perceived inflation. Therefore, in household expectations, the trend is more important than the level.
"WE ARE TRYING TO PULL PRICING TO REASONABLE LEVELS"
The Central Bank's main tool in the fight against inflation is monetary policy. We are trying to pull pricing to reasonable levels with a tight monetary policy. However, in some items and services, pricing is outside the direct control of monetary policy. Since price developments in these items remain above average, they can pull inflation up or limit the decline in inflation. What are these? Two important service items with structural elements: Rent and education. In these two sectors, pricing is done based on past inflation. Because: The rent contract is fixed for 12 months, and the previous year's inflation is taken as a reference for annual renewal. Private school fees are determined once a year and do not change throughout the following year. Therefore, when a new contract is made, the price is determined based on how high the previous year's inflation was. A similar situation exists in education. Private school fees are determined once a year and remain fixed throughout the following year. Because there is a past indexing here and inflation is in a downward trend, past inflation is always above future inflation. Therefore, in these items, especially in two items like rent and education, inflation remains above average; that is, it lags behind. This is the first factor: pricing is done based on the past.
There are a few more factors specific to rent. After the major earthquake disaster our country experienced, there was a decrease in housing supply. Due to the decrease in supply and migration towards large cities, an imbalance between supply and demand occurred in some cities, leading to upward pressure on rents. Another factor, especially in Istanbul, is the urban transformation process. Another effect is the previously implemented 25% rent increase limitation. At that time, since inflation was higher, rent increases were not fully reflected at these levels, and accumulated inflation occurred in some housing. When contracts are renewed, this accumulated inflation is reflected in prices. At this point, we believe that measures to increase housing supply, such as social housing, will be quite beneficial. However, it is also worth noting: Even if you start building social housing today, it will take some time to increase the supply of rents and housing. However, we believe that in the medium term, it will make a very serious positive contribution to the inflation outlook, especially through rent. Another important item that occasionally emerges and raises inflation, even if not continuously, is food.
When you look at food inflation, it has actually been either below or very close to headline inflation since April 2024; in other words, it was not at a level that would disrupt disinflation. However, this year we saw very rapid price increases in just a few months due to agricultural frost followed by severe drought. This somewhat negatively affected perceptions of disinflation. In summary, we can say that food inflation has also contributed to the slowdown in disinflation recently.
"IT IS IMPORTANT FOR INTEREST RATE DECISIONS TO BE IN LINE WITH INFLATION"
For the decisions regarding the policy interest rate to be effective, it is quite important that the interest rate decisions are in the same direction and at a compatible speed with inflation. If this balance is not maintained, changes in the policy interest rate may not reflect in market interest rates. At this point, it is useful to explain a bit about the difference between the policy interest rate and market interest rates. The policy interest rate is a short-term interest rate set by the Central Bank, and funding for banks is provided at this rate for one-week terms. Market interest rates, on the other hand, are the interest rates that citizens and companies are exposed to and are determined by market conditions. There is a common belief in the public: 'If the policy interest rate falls, market interest rates will also fall.' This is not always true. Especially in long-term loans, pricing is more based on expected inflation. Why? Because the lending side (banks) wants to preserve the real return on the money they lend. Therefore, when pricing long-term loans, they create a forecast about what the inflation will be during the term of the loan and base their pricing on that. Thus, if inflation expectations deteriorate, market interest rates may not fall even if the policy interest rate decreases; in fact, they may even rise.
This is especially true for long-term loans. Long-term loans are important for the welfare of citizens; mortgage loans are an example of this. Additionally, since investment loans are also long-term, these loans need to be priced at appropriate levels for a healthy investment environment to develop. In summary: Long-term loan interest rates are determined more by inflation expectations than by the Central Bank's interest rate. If this delicate balance is not managed well, policy interest rate decisions may not reflect in market interest rates; they may even reflect in the opposite direction. We have also shown an example of this with graphs: We experienced a period when market interest rates did not fall while the policy interest rate was falling; on the contrary, they increased. While the Central Bank lowered interest rates by about 5 points, consumer, commercial, and treasury borrowing rates increased by 4-5 points, and even by 7 points in some items. This was because inflation expectations had deteriorated during this period. The opposite example is also possible: If inflation data comes in well while the policy interest rate is stable and the belief in falling inflation strengthens, market interest rates may fall. In other words, the relationship is not one-to-one. We are trying to make the most accurate calibration by considering this delicate balance and our commitment to intermediate targets regarding interest rate cuts. In the upcoming period, inflation data, the inflation path, and expectations will be our main determinants.
"EXPECTATIONS HAVE THE POWER TO SHAPE"
Expectations have the power to shape, especially in inflation. How does this happen? If a belief arises that inflation will increase, it reflects in prices by citizens or in the economy in general. How does it reflect? First, citizens bring forward their consumption demand; they want to buy as soon as possible before prices rise. In this case, sellers have increased pricing power and can raise their prices. In long-term contracts, such as rent, we can see higher increases because expected inflation is high. In summary, high inflation expectations can indeed lead to high inflation. In this respect, the economy differentiates itself from other basic sciences. What expectations are we looking at here? In fact, we are tracking the expectations of three groups. The first is market participants; that is, market professionals, economists. Since their job is to predict inflation, their forecasting performance is very important. The second group is the real sector; the inflation expectations of our firms. Since firms are price setters, their expectations are quite important; if they expect high inflation, they may implement high increases. The third group is households; their expectations are critical as they are the determinants of demand.
Now, when we look at it, we see that the expectations of market participants have been decreasing for quite some time. Although there has been a slight upward movement in the last month or two due to the negative September data, the expectations of the real sector and households are positively trending and continue to decrease. However, the expectations of households, as you mentioned, are quite high. Why are they so high, and can inflation decrease while they are this high? These are important questions. As I mentioned earlier, household expectations actually report the realized inflation and even the felt inflation rather than predicting the future. This is not unique to us; it is the same worldwide. At this point, we conducted a forecasting performance study. We looked at how accurately household inflation expectations predict future inflation. In the graph we prepared here, we see that even in periods when price stability is relatively achieved and inflation is in single digits, household expectations have been on average 10 points above the realizations.
In other words, they have consistently been wrong. Real sector expectations are closer, while market participants are the group that makes the closest predictions. When we look at the recent period, that is, the high inflation period, the forecasting performance of households has deteriorated even further. The difference between predictions and realizations has exceeded 30 points. The performance of the real sector has also deteriorated. In this period, the group that made the best predictions is again market participants. Therefore, for the upcoming period, the most decisive expectations belong to market participants. Since they closely monitor macro data, they look more carefully at both realized inflation and its components such as exchange rates, demand, services, and core goods inflation. Due to the negative data in the last few months, they have made some upward revisions with a slightly pessimistic bias. I believe that as inflation continues to decrease, these expectations will improve.
"THERE IS A SIGNIFICANT UNDERGROUND GOLD STOCK IN OUR COUNTRY"
We make our inflation forecasts based on certain assumptions. After all, there are many internal and external factors that determine inflation. We have to make various assumptions for these factors, and changes in these factors can sometimes differ from our assumptions. When our assumptions are wrong, the direction in which inflation goes can also be different. What are these? Especially when we look at the deviations specific to this year, the first is global conditions. The world has gone through a very different year this year. Especially in April, with the increase in protectionist measures, foreign trade and capital flows changed, and we did not receive the support we expected from the exchange rate this year. In other words, the contribution we expected from the channel we call 'real appreciation' did not come in the first six months. The second is the rise in gold prices.
The reason for this is global. The demand for gold has increased due to the effects of U.S. policies, and as a result, gold prices have risen. This is very important for our reserves. However, as you know, there is also a significant amount of gold stored under mattresses in our country. We estimate it to be between 400-500 billion dollars. According to our estimates, these price increases have caused at least a 100 billion dollar wealth effect. This does not have to be spent, but a portion of it is likely being spent. This is one of the factors that weakens our demand management.
"THE RAPID PROGRESS OF CONSTRUCTION ACTIVITIES."
Another factor is the construction sector. It is certainly very important for our citizens to have access to housing as soon as possible. However, construction is a locomotive sector. The rapid progress of construction activities causes an acceleration of activity in other areas of the economy. This can also lead to a slight slowdown in disinflation. Of course, these are mostly external factors or factors outside our area of influence. We also need to take a look at ourselves. I just mentioned that there is a past indexing in rents and education. That is, past inflation is referenced when new contracts are made. We thought this behavior would change more quickly; we expected that future inflation would be more decisive than past inflation when determining prices such as wages, rents, and education. We were mistaken here. For this reason, the decrease in service inflation, especially due to rents and education, has been slower. We have carried our optimism in this area into the next year. God willing, as disinflation accelerates again, we believe we will break this inertia in this area.
"WE DO NOT HAVE A TARGET OR PROJECTION REGARDING THE EXCHANGE RATE"
"As you said, we do not have a target or projection regarding the exchange rate. Therefore, I cannot evaluate the level the exchange rate has reached, but it must be said: Exchange rate developments are largely a result of interest rate policy. We are tightening monetary policy to achieve balance in the economy, and this monetary tightening increases the attractiveness of the Turkish lira. It has indeed increased. As a result, we have seen our citizens exchanging foreign currency. With the exchange of foreign currency, demand for the Turkish lira has increased, and the real appreciation of the TL against other currencies has emerged. This is not a development we are forcing; there is no suppression of the exchange rate. There is just this situation: Due to the effects of the high inflation period, the foreign exchange market can become very one-sided. On some days, there may be only buyers or only sellers in the market. In this case, a two-sided market does not form. If we do not intervene, volatility can increase excessively. We intervene during such periods. These interventions are sometimes in the direction of buying when everyone wants to sell foreign currency, and sometimes in the direction of selling. But we do not have a target exchange rate.
"OUR PRIMARY GOAL IS PRICE STABILITY"
In short, our studies show that the effect of the real exchange rate on export performance is limited. The main determinant of exports is not the real exchange rate. Its effect may be somewhat greater in certain labor-intensive sectors, but generally, external demand is the decisive factor. You cannot sell a product that has no demand; price may not be very decisive. Considering the process the world is going through, our export performance is actually quite good. Due to protective measures, the period is not easy for exporters; developments have become more important than the exchange rate. In the upcoming period, external demand will be more decisive for export performance.
Currently, the share of the Turkish lira has reached 60% and is quite close to historical averages. Recently, we have frequently encountered this question: 'Interest rates are falling, withholding tax has increased, will the attractiveness of TL decrease?' We have sufficient data for this. Deposit interest rates have fallen by 11 points, and withholding tax has increased. In other words, the return on TL deposits has significantly decreased. However, during this process, despite global adversities, the increase in gold prices has not caused the share of the Turkish lira to decrease; in fact, it has continued to rise. The outlook in funds is somewhat different, but overall, the picture does not change. Therefore, as long as we act cautiously and calibrate monetary policy correctly, I do not expect a negative situation to occur. History has taught us this: The more targets you have, the harder it is to achieve them. If a single target is adopted and decisive steps are taken only regarding that target, the chance of success is much higher. We are acting with this awareness. Therefore, our only primary goal right now is price stability, as mandated by law.