CBRT Governor Karahan's statement on inflation and tightening: 'In case of deterioration...'

In his speech at the International Arab Banking Summit, Karahan addressed the current global economic outlook, monetary policy in Turkey and its effects on the banking sector, as well as recent developments in participation banking and financial technologies.

Stating that the global tightening cycle is at its peak, Karahan said that while inflation in Turkey fell throughout 2023, it continues to remain above the Central Bank's targets.

EXPLICIT INFLATION TARGETING

Noting that central banks in emerging markets have become much more capable of reducing global risks, largely thanks to progress in the development of monetary policies, Karahan said, "First, more and more central banks are adopting explicit inflation targeting. Therefore, they have tightened policy significantly in response to rising inflation following the pandemic. Second, improvements in global financial architecture and domestic policy frameworks have led to less exposure to fluctuations in capital flows."

MESSAGE OF REGIONAL COOPERATION

Stating that according to a recent OECD report, the share of foreign currency-denominated debt issuance by emerging market treasuries fell from 15 percent in 2005 to 4 percent in 2022, Karahan said, "This does not mean that our work on increasing the resilience of financial markets in emerging markets is finished. For example, the use of local currencies in bilateral trade remains limited. Increasing this will further strengthen the resilience of domestic economies against global shocks. Therefore, given the interconnectedness of our economies and financial sectors, we need to continue to improve our regional cooperation."

Addressing inflation expectations in Turkey, CBRT Governor Karahan noted the following:

"According to the latest data released for April, inflation was at 69.8 percent, and due to base effects, we expect inflation to reach around 75 percent in May. In order to restore price stability, we started a tightening process last June, and we are currently seeing significant improvements in our current account balance and foreign exchange reserves, signs of a slowdown in domestic demand, and an increased preference for Turkish lira financial assets. We expect to see a permanent decline in headline inflation starting from June. Although this decline will be partly due to base effects in the summer months, it will be permanent as the improvement in the underlying trend of monthly inflation continues. Our annual inflation forecasts, which also serve as an intermediate target in our monetary policy, are 38 percent for the end of 2024, 14 percent for 2025, and 9 percent for 2026. We will need to maintain a tight monetary policy until a significant and permanent decline in the underlying trend of monthly inflation is observed and inflation expectations approach our forecast range. In the event of a significant and permanent deterioration in the inflation outlook, the monetary policy stance will be tightened."

APPETITE FOR TURKISH BANKS

Fatih Karahan stated that the CBRT's sound monetary policy stance will pull down the underlying trend of monthly inflation through the balancing of domestic demand, the real appreciation of the Turkish lira, and the improvement in inflation expectations.

Pointing out that the banking sector will be among those that benefit most from the decline in inflation in Turkey, Karahan said, "With the establishment of price stability and increased confidence in the Turkish lira, low debt levels mean that a significant growth area will open up for the banking sector."

Emphasizing that the Turkish banking sector is resilient to shocks, Karahan stated that this resilience dates back to the 2001 crisis and has been further strengthened in the post-global financial crisis period.

Reporting that the total asset size of the banking sector exceeded 25 trillion liras (approximately 804 billion dollars) as of the end of March 2024, Karahan said, "The share of loans in total assets is at the 50 percent level. Asset quality is high, and the non-performing loan ratio is at its lowest level in history at around 1.5 percent as of March 2024. The recent upward cycle in interest rates and the increasing global confidence in our path to fighting inflation have also improved the outlook for external financing. With the effect of policy normalization and the downward trend in Turkey's risk premium, we are observing that foreign investors' appetite for Turkish banking sector debt instruments is increasing."

"BANKING SECTOR MAINTAINS STRONG PROFITABILITY"

CBRT Governor Karahan stated that as of March 2024, total deposits accounted for 66 percent of total liabilities, and continued as follows:

"According to our latest data, the share of Turkish lira-based deposits has risen from its lowest level of 31 percent in August 2023 to 45 percent. Furthermore, despite the high inflation environment, the banking sector maintains strong profitability, which supports the core capital of banks. Although profitability has decreased somewhat during the interest rate hike cycle, the sector continues to remain strong in terms of return on equity and return on assets."

Stating that the sector has never had significant problems in accessing global financial markets, Karahan emphasized that this resilience is partly a result of the diversity in lenders, debt instruments, and maturity structures.

Fatih Karahan noted the following:

"Recently, the upward cycle and increasing global confidence in our path to fighting inflation have also improved the outlook for external financing. With the effect of policy normalization and the downward trend in Turkey's risk premium, we are also observing an increase in foreign investors' appetite for the Turkish banking sector. Public and private banks issued numerous long-term Eurobonds in 2023 and this year. Eurobond issuances have reached approximately 13.8 billion dollars since September of last year. Total Eurobond issuances since the beginning of this year have amounted to 7.8 million dollars, while subordinated debt issuances have reached 4.1 billion dollars."

SYNDICATED LOANS

Fatih Karahan reported that banks have renewed their syndicated loans under favorable conditions.

Karahan said, "Our monetary policy approach will continue to support the growth of the banking sector. So far, we have rearranged macroprudential regulations to complement monetary tightening. These regulations serve to sterilize excess Turkish lira liquidity, support the transition to Turkish lira deposits, and prevent excessive credit growth."

However, stating that they are in a transition phase, Karahan pointed out that they are aware of the costs imposed on banks due to the distortive nature of macroprudential regulations. Karahan stated, "For this reason, we have clearly stated that in addition to increases in policy rates, simplification within the macroprudential policy framework will also be a forward-looking policy goal. To this end, we have recently removed all securities maintenance requirements that hindered healthy price formation and market functioning in the Turkish lira bond market."

News Source: AA