Central Bank Deputy Governor Karahan on inflation: Monetary policy is yielding results with lagged effects

In an interview with Reuters, Central Bank Deputy Governor Hatice Karahan said that while monetary policy is beginning to yield results, Turkey's fiscal outlook will be critical in shaping the inflation trajectory. Karahan's statements are as follows:

"As monetary policy begins to yield results with lagged effects, we attach great importance to the strong support of fiscal policy to ensure that disinflation progresses in the most effective way.

Undoubtedly, for price stability to be achieved, the decline in inflation must continue strongly. The fiscal outlook will be of critical importance in shaping the inflation outlook in the coming period. In this context, the Medium-Term Program (MTP) will set out a roadmap this week.

The continuation of the weakening in the underlying trend of monthly inflation is of critical importance for the disinflation path we are targeting.

We expect items containing time-dependent price adjustments, which have recently increased the underlying trend, to enter a downward trend in the last quarter of the year."

INTEREST RATES RAISED TO 50 PERCENT

The Central Bank has raised interest rates to 50% since June of last year and, following the latest tightening in March, has pledged to remain vigilant against inflation risks. Annual inflation fell below 52% last month, continuing its decline from the annual peak in May due to base effects and the impact of tight policies. 

After annual CPI reached its highest level since late 2022 at 75% in May, disinflation began as the monetary tightening campaign, which has lasted more than a year, started to bring relief to prices.

However, due to one-off effects, monthly inflation has followed a volatile course since the beginning of the year. Inflation increased by 2.47% in August compared to the previous month. The Central Bank forecasts that inflation will fall to 38% by the end of this year and to 14% by the end of next year, and projects it will decline to 9% by the end of 2026. According to data released at the beginning of the week, the Turkish economy grew less than expected in the second quarter, expanding by 2.5% annually despite a year-long monetary tightening campaign.