CBRT Governor Karahan announces inflation target

Attending the Istanbul Chamber of Industry Assembly Meeting, CBRT Governor Fatih Karahan said in his speech, "In addition to our determined stance on monetary policy, we expect the improvement in expectations to continue, supported by the decline in headline inflation."

In his speech there, Karahan noted the following:

We will maintain our tight monetary policy stance until we approach our inflation target. Inflation, which fell rapidly in the summer months due to the base effect, will continue to decline in the coming period with the decrease in monthly inflation. As a result of our tight monetary policy, the rebalancing in domestic demand will continue. We will determine the policy rate level at the level required by the disinflation process.

In his speech, Karahan said, "While capital flows towards Turkey continue, the increase in reserves has reached 58.2 billion dollars since May 2023."

'WE AIM TO REDUCE INFLATION TO 21 PERCENT BY THE END OF 2025'

Stating that the disinflation process is continuing, CBRT Governor Karahan said, "Inflation, which fell rapidly in the summer months due to the base effect, will continue to fall in the coming period with the improvement in monthly inflation. We aim to reduce inflation to 21 percent by the end of 2025."

Karahan stated that the Istanbul industry, which has gained an important place in the world, alone provides approximately 30 percent of industrial production and employment in Turkey.

Expressing that they have strong communication with the real sector as the Central Bank, Karahan noted that they have gained impressions from the field through meetings with company and sector representatives, and that they are aware that they will make the greatest contribution to social welfare by ensuring price stability.

Karahan said, "With the continuation of the disinflation process and the subsequent establishment of price stability, predictability will increase. Thus, investment, production, and consumption decisions will be able to be taken with a longer-term perspective."

Fatih Karahan noted that the disinflation process is continuing and stated, "Consumer inflation fell to 48.6 percent in October, a significant drop compared to its peak in May. We expect inflation to fall to 44 percent by the end of the year."

Stating that the underlying trend of inflation is improving, albeit slower than their forecasts, Karahan continued his words as follows:

In this development, in addition to the low-running core goods inflation, services sector inflation, where signs of improvement are becoming evident, also plays a role. Inflation, which fell rapidly in the summer months due to the base effect, will continue to fall in the coming period with the improvement in monthly inflation. We aim to reduce inflation to 21 percent by the end of 2025. Macroeconomic indicators are progressing in line with the disinflation process. Domestic demand continues to slow down and has reached levels that support the decline in inflation. We see a tendency for improvement in inflation expectations and pricing behaviors. We are closely monitoring the course of expectations and pricing behaviors.

'WE WILL MAINTAIN OUR TIGHT STANCE ON MONETARY POLICY'

CBRT Governor Karahan emphasized that they will maintain their tight stance on monetary policy in a way that ensures the continuation of disinflation, and stressed that the slowdown in the underlying trend of inflation continues and that they are closely monitoring the underlying trend of inflation.

Stating that when they examine the indicators they follow within the Central Bank as a whole, they saw a decline in the underlying trend of inflation in October, Karahan explained that this slowdown has spread to the general underlying trend indicators and that the improvement in the underlying trend continues, led by core goods.

Noting that core goods inflation maintains its low course and is driving the aforementioned slowdown in the underlying trend, Karahan stated that signs of improvement in services inflation are becoming evident, and that they are observing a gradual improvement, more pronounced in the non-rent portion.

'PRICE INCREASES IN SERVICES OTHER THAN RENT ARE GRADUALLY WEAKENING'

Fatih Karahan stated that when looking at groups outside of core, energy price increases strengthened in the third quarter, and continued as follows:

In this development, the effects of administered energy item price developments as well as specific tax updates came to the fore. On the food side, following the improvement in the third quarter, we saw high price increases in the unprocessed food group in October due to temporary supply conditions. This outlook continues in November. On the other hand, food inflation excluding fresh fruits and vegetables is running lower. Items with a strong tendency for backward-looking indexation are pulling up services inflation. If we look more closely at services inflation, the high course in the third quarter continued, led by rent and education, which have strong periodic pricing and backward-looking indexation behavior and are subject to price increase limitations.

Noting that the back-to-school effect was evident on services inflation in the third quarter, Karahan stated that with the completion of the back-to-school period, the relative price adjustment in the aforementioned groups has been largely completed.

Stating that "Price increases in services other than rent are gradually weakening," Karahan emphasized that they consider it healthier to look at services price dynamics in terms of rent and non-rent.

Expressing that rent is an issue that should be handled separately from other service items due to reasons such as earthquakes, urban transformation, and rent increase limitations, and that it also has a structural dimension, Karahan said, "For these reasons, while we assess that the inertia in rent inflation is higher than our forecasts, we see that services excluding rent are slowing down more significantly."

'INDICATORS POINT TO A SLOWDOWN IN MONTHLY RENT INFLATION IN THE LAST QUARTER'

Central Bank Governor Karahan underlined that the leading indicators obtained from the retail payment system for November point to a slowdown in monthly rent inflation in the last quarter.

Stating that the macro outlook continues to contribute to the disinflation process, Karahan made the following assessments:

Our determined stance on monetary policy will continue to lower the underlying trend of monthly inflation through rebalancing in domestic demand, real appreciation in the Turkish lira, and improvement in inflation expectations. Furthermore, we assess that the increasing coordination of fiscal policy will also make a significant contribution to this process. The rebalancing in demand continues. In the second quarter of the year, while the contribution of domestic demand to annual growth decreased significantly, the positive contribution of net exports to growth continued. In this period, while domestic demand contributed 1.2 points to growth, the contribution of net exports was 1.3 points. Thus, the demand composition in growth exhibited a more balanced outlook. We expect this outlook to continue in the third quarter data to be announced on Friday.

Noting that the slowdown in domestic demand is moderate, Karahan said that current data for the third quarter shows that the moderate course in domestic demand continues.

Expressing that retail sales increased slightly compared to the previous quarter in this period, Karahan said, "However, when we look at retail sales in more detail, we see that the increase, excluding gold, is more moderate. The services production index also points to a rebalancing in domestic demand. In addition to these indicators, the information we obtained from company meetings also confirms the slowdown in domestic demand."