Türkiye’s central bank is committed to maintaining a tight monetary policy to sustain the disinflationary momentum, its Governor Fatih Karahan said on Wednesday.
“We will set the policy rate at a level that ensures the tightness required by the projected disinflation path, considering inflation realizations and expectations,” Karahan told a meeting at the Istanbul Chamber of Industry (ISO).
The bank has held its policy rate steady at 50% since March, when it raised its policy rate by 500 basis points to round off an aggressive tightening cycle that started in June last year to rein in soaring inflation.
Karahan’s remark marked a repetition of a statement by the central bank following its last policy-setting meeting a week ago when it said it remained attentive to inflation risks, while analysts said its comments opened the way for a possible rate cut in December.
In a change of messaging in September, the bank began setting the stage for a rate cut by dropping a reference to potential further tightening, but it has continued to voice caution on inflation.
Annual inflation eased to 48.58% in October from a peak of 75.45% in May, according to official data.
The tight stance will be maintained until a notable decrease is ensured in the main trend of monthly inflation, Karahan said on Wednesday.
He earlier said the policy would remain tight even when a rate-cutting cycle started, and that keeping the current interest rate amid improving inflation expectations would amount to a tightening.
Monthly inflation improvements
Earlier this month, the central bank raised its year-end inflation forecasts for this year and next to 44% and 21%, respectively. It previously forecast year-end inflation of 38% in 2024 and 14% next year.
The government anticipated end-2024 and end-2025 inflation of 41.5% and 17.5%, respectively.
“While inflation’s overall trend is improving, it is happening more slowly than anticipated,” said Karahan.
Inflation fell rapidly in the summer months due to base effects and is expected to continue decreasing in the coming months with monthly inflation improvements, he noted.
In October, high price increases were observed in unprocessed food due to temporary supply conditions, and this trend continued in November, according to the governor.
On the other hand, Karahan said leading indicators for November suggest that housing rent inflation would slow down in the last quarter.
The bank expects monthly inflation’s overall trend to continue decreasing, aided by a more balanced domestic demand, the real appreciation of the Turkish lira, and improved expectations, the governor added.
“We think the increased coordination of fiscal policy will significantly contribute to the process,” said Karahan.
Rebalancing in economy
The demand composition in the economy has become more balanced, and the upcoming third quarter gross domestic product (GDP) data is expected to reflect this trend, according to the governor.
The economy grew 5.3% in the first quarter of this year, with strong domestic demand pushed up by a minimum wage hike and households bringing purchases forward in expectation of higher inflation ahead.
In the second quarter, sagging demand brought growth down to 2.5% in the face of the tightening campaign.
The economy grew an annual 5.1% in 2023 and 6.5% in the third quarter of that year despite a slowdown in main trading partners and fallout from devastating earthquakes in February.
For this July-September period, surveys are estimating a growth of around 2.6%. The Turkish Statistical Institute (TurkStat) will release the third quarter data on Friday.
Karahan said third quarter output has decreased, and the indicators show the same trend continues in the fourth quarter and will likely move into negative territory.
Economists expect tight monetary policies and fiscal measures will continue to slow domestic demand through the end of the year.
The government forecasted the economy to grow 3.5% this year and 4% next.
The tight policy is expected to continue supporting the balancing of domestic demand and contributing to the disinflation process, said Karahan.
“Price stability is essential for sustainable growth and increased societal welfare,” said the governor. “We will continue our tight monetary policy stance until price stability is fully achieved.”
