Fatih Karahan spoke about the year-end inflation target: How will the policy rate be determined in the coming period?

Central Bank of the Republic of Türkiye (CBRT) Governor Fatih Karahan also visited the AA New York Office during his contacts in the US.

Karahan made statements here regarding the economic agenda.

Stating that they assess the recent decline in inflation as stemming from a decrease in the main trend, driven by tight monetary policy rather than base effects, Karahan expressed that the improvement in the main trend will also be effective in the decline of inflation for the remainder of the year, saying, "We will do whatever it takes to reach our year-end inflation target of 24 percent."

Emphasizing that they will continue their tight monetary policy stance, Karahan stated that it is extremely important for demand to remain at disinflationary levels for the continuation of the decline in inflation.

"We will not allow demand conditions to disrupt the disinflation process," said Karahan, pointing out that the transition from individual currency-protected deposit accounts to the Turkish lira is higher than the transition to foreign currency.

CBRT Governor Karahan indicated that the priority when determining the policy rate in the coming period will be to ensure the tightness required by the disinflation path, noting, "We will maintain our tight monetary policy stance until a permanent decline in inflation and price stability are achieved."

The responses given by Karahan on various topics, from the fight against inflation to monetary and interest rate policies, and from the transition from currency-protected deposits to the Turkish lira to foreign currency loans, are as follows:

QUESTION: Inflation came in high in January, but we saw a decline again in February. How should we read the inflation data in the coming period?

ANSWER: Annual inflation has been declining since its peak in May 2024. A significant portion of the decline seen in the first months of the disinflation process stemmed from the base effect created by developments in the summer of 2023. During this period, we shifted the emphasis to monthly price developments in order to guide expectations regarding the policy rate more healthily. In this direction, we were looking at the trend of seasonally adjusted main trend indicators over the last few months. At the point we have reached, we assess that the decline in inflation stems from the decrease in the main trend, driven by tight monetary policy rather than base effects. The improvement in the main trend will also be effective in the decline of inflation for the remainder of the year. In addition, there are situations where seasonal adjustment methods cannot capture the seasonality that has changed after the pandemic. When these are put together, we assess that comparing the main trend indicators with the same month of the previous year would be healthier.

Looking at the February main trend indicators with this perspective, we see that the seasonally adjusted B index fell from 4.3 percent in 2024 to 2.8 percent in 2025, and the C index fell from 3.7 percent to 2.4 percent. As is known, these two indices rise in January, February, and July due to temporary factors that fall outside the scope of monetary policy. In these months, distribution-based indicators such as median and SATRIM can provide a better idea about the course of inflation. Median price increases fell from a monthly average of 4.7 percent in the January-February period last year to 2.1 percent in the same period this year. We saw a similar decline in SATRIM. When we put all these together, we see that the monthly main trend has decreased by one-third in B and C indicators and by half in median and SATRIM since last year.

"WE WILL DO WHATEVER IT TAKES TO REACH OUR TARGET"

It is also useful to look at inflation on a sub-item basis to understand inflation dynamics. In the context of annual inflation developments, we assess that goods inflation remains low, while on the services side, although rigidities have begun to break, the level is high. Rent and education items, which have a high tendency for time-dependent price setting and indexation to past inflation, stand out here. Annual rent inflation was 121 percent in February last year and reached 97 percent this year. In this item, both the level is high and disinflation is slow. We observe a similarly limited improvement in education.

On the other hand, we see a significant improvement in items in the services group that are more sensitive to monetary policy. For example, restaurant and hotel inflation fell from 95 percent to 46 percent. This actually shows that monetary tightness is effective in reducing this type of services inflation.

We will do whatever it takes to reach our year-end inflation target of 24 percent. By continuing our tight monetary policy stance, we will continue to reduce inflation in line with our year-end targets.

QUESTION: Demand was strong in the fourth quarter of last year. What does this data mean for the inflation outlook?

ANSWER: Before the national income data for the fourth quarter was announced, we were following data such as card expenditures, credit growth, and retail sales to understand demand conditions. The data in question showed that while demand was somewhat resilient in the fourth quarter, it was at disinflationary levels. The relevant growth data announced at the end of February showed that demand was stronger than we had estimated. Indeed, we emphasized this in the latest MPC decision text. It is extremely important for demand to remain at disinflationary levels for the decline in inflation to continue. In this direction, when we look at the data announced for the first quarter, we see that retail sales maintained their strength in January, while vehicle trade and wholesale trade volumes declined. Credit growth is more moderate compared to the fourth quarter. Card expenditure data points to a weaker trend in January and February.

Therefore, current demand indicators for the first quarter, while containing some uncertainty, imply that consumer spending has followed a more moderate course following the increase observed in the previous quarter. We will continue to evaluate this outlook as demand indicators for the first quarter accumulate. We will not allow demand conditions to disrupt the disinflation process.

QUESTION: We saw an increase in the current account deficit in January. The emphasis on real appreciation in the Turkish lira continues to be included in your monetary policy texts. Can you evaluate the real appreciation in the Turkish lira and the current account deficit outlook for 2025?

ANSWER: When we look at current account balance developments, we see that the ratio of the current account deficit to national income has fallen from the 5 percent level before the tightening to 0.8 percent as of the end of 2024. Considering that the ratio of the current account deficit to national income has averaged 3.7 percent over the last 20 years, the 0.8 percent rate is quite low compared to historical averages. Recent data, however, point to some increase in the current account deficit in 2025.

When we look at the factors that could affect the current account balance in 2025, uncertainties regarding global trade highlight downside risks stemming from exports. We have also observed a high trend in consumer goods imports recently. Despite these, we expect the ratio of the current account deficit to national income to remain significantly below its long-term averages in 2025, although it will be higher than in 2024.

When it comes to real appreciation, the monetary policy we implement does not have a design focused on real appreciation in the Turkish lira. We do not have any target regarding the level or change of exchange rates. Our determined stance in monetary policy brings with it an increase in interest in the Turkish lira. As a natural result of this interest, while our reserves increase on one hand, there is also real appreciation in the exchange rate on the other.

To evaluate the recent outlook, we can look at the preferences of domestic residents. Recently, there has been a decrease in Turkish lira deposit interest rates and an increase in withholding tax rates on Turkish lira deposits and money market funds. We also took steps to accelerate the exit from "Currency-Protected Deposits" (KKM). In December 2024, we made changes that reduced the returns of KKM accounts. In January, we removed long-term accounts, and finally, in February, we terminated the KKM account opening and renewal transactions for legal entities. Despite all these developments, we see that interest in the Turkish lira continues. When we look at individual KKM accounts, the conversion rate to foreign currency in January was 10 percent, and the rate of staying in the Turkish lira was around 25 percent. A limited change was observed in these rates in February. The conversion rate to foreign currency was 12 percent, and the rate of staying in the Turkish lira was 23 percent. These developments show that the transition to the Turkish lira from maturing KKM accounts is higher than the transition to foreign currency.

"WE WILL MAINTAIN OUR TIGHT MONETARY POLICY STANCE"

I would like to emphasize once again that in the coming period, our priority when determining the policy rate will be to ensure the tightness required by the disinflation path. We will maintain our tight monetary policy stance until a permanent decline in inflation and price stability are achieved. Our determined stance in monetary policy will support interest in the Turkish lira.

QUESTION: You had reduced the growth limit for foreign currency loans to 1 percent in January. At the beginning of March, with a new regulation, this limit was reduced to 0.5 percent and the scope of the exception was narrowed. What is the reason for this decision? Has the desired slowdown in foreign currency loans been achieved with the new regulation?

ANSWER: Tight monetary policy is tightening the Turkish lira credit market as we intended, but due to the stable course of the exchange rate, foreign currency (FC) loans are becoming relatively less costly. Indeed, the real sector has provided approximately 50 billion dollars of financing this way since the end of 2023. This strong credit growth creates risks for monetary expansion and the foreign currency position of the real sector. In addition to these, the increase in FC loans increases the demand for foreign currency liquidity in the financial system. Especially recently, we have seen that this situation has caused an increase in Foreign Currency Deposit Account (DTH) interest rates and increased the risk of deposit dollarization. We had already narrowed the FC loan growth limit somewhat in January, but we saw that the increase in FC loans continued in the first quarter and that this increase largely came from items that were kept exempt from growth limits. In line with these observations, we narrowed both the exception areas and the growth limit for FC loans.

Since there is limited data flow after the regulation, it is too early to say anything. We assess that these changes will strengthen the monetary transmission mechanism and reduce the risks to macro-financial stability.

News Source: AA