Fatih Karahan, governor of the Central Bank of the Republic of Türkiye (CBRT), said Wednesday that they will maintain a tight monetary policy stance until a permanent fall in inflation and price stability is achieved.
Speaking at the German-Turkish Chamber of Commerce and Industry (AHK) Economy meeting, Karahan stated that the economic and trade relations between Germany and Türkiye contribute to mutual prosperity and growth.
Stating that the developments in the markets last week caused value losses in financial assets, Karahan said: “We took swift action to ensure that the volatility in the market is temporary and its reflections on the economy are short-term.”
Pointing out that they have proactively taken and will continue to take every necessary step by staying within the market rules, Karahan said: “We use our tools effectively to maintain the stable functioning of the markets. We keep our two-way communication channels open at all times.”
Underlining that the CBRT has a very broad and powerful toolkit, Karahan said: “We resolutely maintain our tight monetary policy stance to ensure price stability, which is our main objective.”
Stating that economic activity recovered in the last quarter of last year, Karahan continued: “In this period, household demand for goods remained strong as a result of the demand brought forward due to campaigns and upcoming wage updates. Thus, private consumption increased quarterly. Throughout the year, the positive contribution of net exports came to the fore with a significant decline in the contribution of domestic demand to growth. After declining in the second and third quarters of 2024, industrial production started to increase again in the last quarter of the year. As of January, it continues to rise on a quarterly basis.
The Services Production Index also showed a similar but more moderate recovery in the last quarter of 2024. As you know, this index is also directly related to demand in the services sector. The index pointed to a flat course in demand for services throughout 2024. The strong increase in the services production index in January was driven by sectors with a relatively weaker relationship with consumer demand and consumer prices, such as professional, scientific, and technical activities and information and communication.”
‘WE WILL NOT ALLOW DEMAND CONDITIONS TO DISRUPT DISINFLATION PROCESS’
Karahan stated that the retail sales volume index recorded an increase in January and real card expenditures pointed to a weaker outlook and added: “It seems that expenditures, especially in the service sectors, have followed a moderate course. At this point, I would like to emphasize that we closely monitor demand indicators and will not allow demand conditions to disrupt the disinflation process. In line with the more balanced course of domestic demand, there was a significant improvement in the current account. In the last quarter of 2024, the ratio of the current account deficit to GDP was reduced to 0.8%.”
Stating that recent data point to a slight increase in the current account deficit in 2025, Karahan said: “When we look at the factors that may affect the current account balance in 2025, uncertainties regarding global trade and export-driven downside risks stand out. Imports of consumer goods have been high recently. Despite these, we expect the ratio of current account deficit to GDP to remain significantly below long-term averages in 2025, albeit higher than in 2024.”
Karahan stated that exports maintained their strength with a moderate increase despite the weak foreign demand compared to the averages of the previous period and said: “As a matter of fact, the fact that Türkiye’s export share increased against the weak course of the EU’s imports of goods indicates that exporters generally maintained their competitiveness. There has been an improvement trend in the foreign trade balance in the recent period. The core balance, which excludes gold and energy, wants a flat course.”
‘DISINFLATION PROCESS THAT STARTED IN JUNE LAST YEAR CONTINUES’
Fatih Karahan pointed out that the disinflation process that started in June last year continued and said: “Consumer inflation fell to 39.1% in February, showing an uninterrupted and significant decline compared to its peak in May 2024. The underlying trend rose in the first quarter of the year, in line with our projections. Following the increase in January, the underlying trend showed a significant slowdown in February.”
Noting that the underlying trend indicators may differ from each other according to periodic developments, Karahan said: “This situation, as we have previously stated, reveals the importance of monitoring the underlying trend through different indicators.”
Stating that a more favorable outlook is observed in the underlying trend when median inflation is analyzed, Karahan added: “When we look at consumer price developments on the basis of subgroups, goods inflation is low. Core goods prices remained quite mild in the first two months of the year.”
Pointing out that two important factors will be decisive in March and April, Karahan said: “One of these is the impact of Ramadan on food prices and the other is the reflection of recent developments in financial markets on prices and expectations. These factors increased the upside risks in inflation, especially for April. When we take a closer look at services inflation, we see that items such as education and rent, which have a strong tendency to be indexed to the past, are pushing it up.”
LIMITING VOLATILITY IN MARKET
Stating that the developments in the markets last week caused depreciation in financial assets, Fatih Karahan said: “When we look at the highest end-of-day levels reached by some indicators due to the high volatility environment, we saw increases of 3% in the exchange rate, 71 basis points in the country risk premium, 4.5 points in the 10-year benchmark bond interest rate, and 15 points in the one-month forward exchange rate volatility.”
Karahan stated that they quickly took the necessary measures to prevent these increases from deteriorating the macroeconomic outlook, adding: “Thus, the increase in indicators that exhibited excessive volatility on March 19 was more limited. In this context, as the Monetary Policy Committee, we convened on March 20 to evaluate the developments. We took measures to support the tight monetary stance by assessing the risks that these developments may pose to the inflation outlook. Accordingly, we increased the Central Bank overnight lending rate from 44% to 46%. We kept the policy rate at 42.5% and the Central Bank overnight borrowing rate unchanged at 41%. In addition, we suspended one-week repo auctions for a while.”
Reminding that they took measures for TL and foreign exchange liquidity to limit the volatility in the market, Karahan said: “In this context, we extended the maturities of TL deposit auctions. In addition, we increased the diversity of our liquidity instruments and started to issue liquidity securities with maturities up to 91 days.”
TIGHT MONETARY POLICY STANCE
Fatih Karahan stated that they started TL-settled forward foreign exchange sales transactions at the CBRT for foreign currency liquidity.
Noting that these transactions, known as NDF, provide protection from exchange rate risk for companies that will make transactions in foreign currency in the future, Karahan said: “In this way, it supports the efficiency of foreign exchange markets by reducing exchange rate volatility.”
Stating that they will continue to use all monetary policy tools decisively within market rules in order to maintain the effective functioning of financial markets, he added: “We will determine our steps with a proactive approach to limit the macroeconomic effects of market volatility. There is no deterioration in the fundamental dynamics of our economy. The current account deficit is at historically low levels. Our reserve position is quite strong. We will maintain our tight monetary policy stance until we achieve a permanent fall in inflation and price stability. In case of a significant and permanent deterioration in inflation, we will tighten our monetary policy stance.”