CBRT Governor Fatih Karahan holds his first meeting: "We will enter a disinflation period after May"

Central Bank of the Republic of Türkiye (CBRT) Governor Dr. Fatih Karahan spoke at the 2024 first Inflation Report Briefing Meeting. At the meeting, Karahan said, "The level and distribution of inflation expectations have improved significantly. The convergence of expectations to the forecast range is an important criterion for the stance of monetary policy."

Highlights from Karahan's statements are as follows:

"As the Central Bank, we will continue our efforts to establish disinflation with our strong team with determination.

We are determined to maintain monetary tightness until inflation reaches levels consistent with our targets. We are closely monitoring inflation expectations and pricing behaviors. We will absolutely not allow any deterioration in the inflation outlook.

"WE WILL ESTABLISH PERMANENT PRICE STABILITY IN OUR ECONOMY IN THE MEDIUM TERM"

By maintaining our policy stance until we achieve permanent price stability, we will reduce inflation to the path we have estimated and reach permanent price stability in our economy in the medium term.

Globally, the timing and pace of interest rate cuts have gained importance in the coming period. It is assessed that central banks will continue their reduction processes gradually and that monetary tightness will be maintained on a global scale.

In some developing countries, interest rate cuts are continuing in parallel with the decline in inflation.

It is assessed that central banks will continue their reduction processes gradually and that monetary tightness will be maintained on a global scale.

With our tightening steps, a rebalancing in demand has begun in Türkiye. We are determined to maintain our monetary stance to ensure that domestic demand moves in the direction of disinflation.

"INFLATION IS CONSISTENT WITH REPORT FORECASTS"

In the last quarter of 2023, inflation followed a course consistent with previous report forecasts. Demand conditions pulled inflation down by 1 point.

The rebalancing process in demand has begun with tightening steps.

Recently, the import trend has weakened. The increase in automobile imports has also slowed down during this period.

Provisional data for January show that the improvement in foreign trade trends continues. With the weakening of demand and the improvement in expectations, an improvement in the current account balance has been observed. We believe that the improvement in the current account balance will continue in 2024 with the rebalancing in domestic demand.

Although a slowdown was recorded in the trend of services inflation in the last quarter, rigidity persists. An important component of the rigidity in services inflation is rents.

Developments in the housing market are being closely monitored as leading indicators. The rate of increase in housing prices in large cities has slowed down significantly.

"IMPROVEMENT IN INFLATION LEVEL"

The level and distribution of inflation expectations have improved significantly. The convergence of expectations to the forecast range is an important criterion for the stance of monetary policy.

Due to the effect of wage and price adjustments, monthly CPI in the services group came in above our estimates.

High-rate increases were observed in service prices in January. A major reason for the rigidity in services inflation is rents, which are being closely monitored as an indicator. Reducing the pressure on rents will play an important role in service prices.

The high increase in housing prices is reflected in rents with a delay and in a high manner. After the tightening, the rate of increase in housing rents in large cities has slowed down. The slowdown in the increase in housing prices will contribute to the reduction of inertia in service prices.

"WE ASSESS THAT THE MAIN TREND OF INFLATION WILL WEAKEN"

We find it important for the course of monetary policy to see a significant improvement in the main trend of inflation that is consistent with our targeted path. We assess that the main trend of inflation will weaken after the rise in January. We will be closely monitoring the reflections of wage adjustments on demand.

"REDUCTION IN KKM CONTINUES"

Practices aimed at reducing KKM and increasing the share of TL deposits are continuing. The balance of the TL deposit purchase auction, which was 290 billion TL as of the end of 2023, rose to 603 billion TL in January and then fell to 100 billion TL as of February 5.

TL deposit interest rates have started to rise again. The transition to TL deposits is continuing. However, we saw that the increase in the TL share slowed down in January. We will accelerate this again with the latest regulation.

The current level of the policy rate will be maintained as long as necessary. There are two conditions here. The first is a significant decline in the main trend of monthly inflation. The second is the convergence of inflation expectations to the projected forecast range. If a significant deterioration in inflation is observed, monetary tightness will be reviewed."

With our tightening steps, a rebalancing in demand has begun in Türkiye. We are determined to maintain our monetary stance to ensure that domestic demand moves in the direction of disinflation.

"2024 YEAR-END INFLATION FORECAST IS 36 PERCENT"

A strong increase is observed in capital inflows. Although capital flows lost momentum with January, they remained on the positive side. With this effect, the strengthening in reserves continued. We will continue to monitor market conditions and maintain the improvement in reserves.

The 2024, 2025, and 2026 year-end inflation forecasts have been maintained as they were in the previous report. The 2024 year-end forecast remained at 36 percent, and the 2025 year-end forecast remained at 14 percent. The lower and upper points of the forecast ranges correspond to 30 and 42 percent for 2024, and 7 and 21 percent for 2025.

It is projected that inflation will complete 2026 by falling to single-digit levels at 9 percent and stabilize at the 5 percent target in the medium term.

"KKM SHARE HAS FALLEN TO 16 PERCENT"

We will continue liquidity sterilization with a proactive approach and strongly. TL deposit interest rates have started to rise again. We observed that the increase in the TL deposit share slowed down in January.

With the latest regulations, it is aimed to increase the share of TL deposits, support the transition from KKM to TL deposits, and strengthen monetary transmission.

In the last 5 months, TL deposits have increased by 2.4 trillion TL, KKM has decreased by 910 billion TL, and foreign currency deposits have decreased by 1.3 billion dollars, or 3.6 billion dollars adjusted for parity and price effects. While the TL deposit share rose to 43 percent, the KKM share fell to 16 percent.

"THERE WILL BE A DISINFLATION PERIOD AFTER MAY"

Until the end of May, when inflation will see its peak, some temporary effects will be seen as in January. After May, we will enter a disinflation period in annual headline inflation.

The level of tightness and the tools at our disposal will ensure that the transition to TL deposits continues in this way."

After the press conference, Karahan answered questions. Karahan answered a question from a Sözcü newspaper reporter as follows,

"The previous governor said he couldn't make ends meet; can you make ends meet? Will you have any work regarding the personnel dismissed during the previous governor's term? The previous governor said there are billions of dollars on my desk; do you also have billions of dollars in your drawer?"

"We gathered here to talk about inflation, therefore I will not answer your questions. We gathered here to talk about inflation and liquidity. If you have questions on this subject, I can take them."

News Source: 12punto