Breaking News: CBRT Governor Fatih Karahan announces the third inflation report of the year: Year-end inflation forecast remains unchanged, date given for single-digit inflation

Central Bank of the Republic of Türkiye (CBRT) Governor Fatih Karahan announced the third inflation report of the year.

The Central Bank did not change its inflation targets for 2024, 2025, and 2026. The CBRT maintained its year-end inflation forecast at 38 percent. The 2025 and 2026 forecasts remained at 14 percent and 9 percent, respectively.

CBRT Governor Karahan stated that there have been significant improvements in inflation and exchange rate expectations.

Regarding a question about interest rate cuts, Karahan did not provide a clear direction, stating that the tight monetary policy will continue. Karahan noted that there may be a decline in growth figures during the disinflation process.

Highlights from Karahan's statements are as follows:

Türkiye's external demand outlook remained flat compared to the previous reporting period.

"GLOBAL INFLATION IS FALLING"

It is observed that the decline in global headline and core inflation continues. Faster interest rate cuts are being priced in across developed countries.

Moderate growth and the inflation outlook point to central banks reducing monetary tightness.

Net exports contributed positively to annual growth for the first time since the first quarter of 2022.

Leading indicators for the third quarter point to normalization in domestic demand.

Normalization in domestic demand continues. Essential expenditures such as food and clothing remain flat.

"REBALANCING IN DEMAND WILL CONTINUE"

Industrial production fell in the second quarter. The decline in production was more moderate. Capacity utilization and PMI data confirm the loss of momentum in the industry.

We anticipate that the rebalancing in demand will continue to strengthen. With the effect of this rebalancing, the decline in the current account deficit continues.

The only element that has not changed since the previous Report period is our determined stance on monetary policy. We will continue to maintain this stance in the coming period and act in a way that ensures the continuation of disinflation.

We assess that domestic demand slowed in the second quarter, although it is still at an inflationary level.

Consumer inflation in July was 61.8 percent, within the forecast range we predicted in the previous Inflation Report. The weakening in the main trend of inflation was in line with our projections.

In July, consumer inflation increased due to temporary effects that are relatively outside the scope of monetary policy.

"RENT INFLATION WILL DECREASE"

Although services inflation has been slowing recently, we see that price increases in this group are strong compared to basic goods.

Annual rent inflation continues to draw attention with its high course. Leading indicators have turned downward for some time. Indicators point to a decrease in annual rent inflation in the coming period.

The convergence of inflation expectations to the forecast range is of critical importance for disinflation.

With our tight monetary policy stance, we are determined to ensure that expectations are formed in a way that contributes to the disinflation process.

"WE ARE CLOSELY MONITORING LIQUIDITY CONDITIONS"

We continue to implement macroprudential policies to increase the effectiveness of monetary transmission against the divergence in the expectations of economic units and possible volatilities.

We are closely monitoring liquidity conditions, taking into account possible developments. We will continue to use sterilization tools effectively by diversifying them when necessary.

Our monetary policy stance and macroprudential framework will ensure that deposit interest rates remain at levels that will continue the transition to the Turkish Lira and increase savings.

IMPROVEMENT IN EXCHANGE RATE EXPECTATIONS

There has been a significant improvement in inflation and exchange rate expectations.

Recent developments in credit growth confirm that the tightness in financial conditions is at a level that will support the disinflation process.

The additional monetary tightening we implemented in March increased the confidence of domestic and foreign residents in the Turkish Lira and was reflected positively in reserves. As of July 31, we reduced the CBRT-sided swap balance to zero.

INFLATION EXPECTATIONS HAVE NOT CHANGED

While creating medium-term forecasts, an outlook in which the tight stance in monetary policy is maintained and coordination in economic policies is preserved until a clear and permanent improvement in the inflation outlook is achieved has been taken as a basis.

We did not change our year-end inflation forecasts for 2024, 2025, and 2026. We project that inflation will fall to 38 percent by the end of 2024.

We maintained the 2025 and 2026 forecasts at 14 percent and 9 percent, respectively. In the medium term, we aim for inflation to stabilize at 5 percent.

EMPHASIS ON TIGHT MONETARY POLICY

Our determined stance on monetary policy will continue to reduce the main trend of monthly inflation through rebalancing in domestic demand, real appreciation in the Turkish Lira, and improvement in inflation expectations.

With the maintenance of the cautious stance in monetary policy, we anticipate that inflation will continue to decline steadily for the remainder of the year.

We will resolutely maintain our tight stance in monetary policy until price stability is achieved.

In the disinflation process that began in June, we will continue to do whatever is necessary to reduce inflation in a way that is consistent with the intermediate targets we have set.

WILL THE INFLATION TARGET BE MET?

We did not change our forecast because the data flow was consistent with our estimates. Approaching forecasts as a point may not be very healthy. It is not easy to set an exact forecast target; it may be useful to look within the framework of lower and upper limits. There are also some downside risks.

As a country, we do not have a growth problem. There may be some decrease in growth during the disinflation process.

WILL THERE BE TEMPORARY SPIKES IN PRICES?

Energy prices have remained largely stable for the last 2 years with various subsidies. In an inflationary environment, the share of energy expenditures in the household budget has fallen. Inter-institutional coordination is at a high level. We will evaluate the data for the coming period. The supply-demand balance has been restored; we see the temporary effects as lower.

WHEN IS THE FIRST INTEREST RATE CUT?

We will need to maintain a tight stance for a long time. This does not mean that interest rates will not fall during this process. Even when the interest rate cut cycle is entered, a tight stance can be maintained.

We are observing two conditions for an interest rate cut. We emphasize monthly inflation. We look at the main trend; we are evaluating whether there is a clear and permanent decline. We want to be sure that the decline in monthly inflation is permanent. Household expectations have a downward trend, but there is no progress yet in the real sector.

News Source: 12punto