The Turkish central bank maintained its previous shared inflation forecast for the end of this year, as it expects domestic demand to continue weakening due to the monetary policy, its governor said while presenting the quarterly report. Annual consumer inflation is projected to reach 38 percent in 2024, Central Bank of the Republic of Türkiye (CBRT) Governor Fatih Karahan told a briefing in Ankara, held to release the bank’s third inflation report this year.
The monetary authority also kept the estimates unchanged for next year, at 14 percent and 9 percent for 2026, as announced in its previous report earlier this year. The unchanged projection came after the central bank held its policy rate steady for four consecutive meetings.
Uncertainties and widened forecast range for 2024
“As we approach the year’s end, the forecast range corresponding to 2024 should have narrowed down mechanically. However, given the mounting uncertainties amid recent geopolitical developments and global financial volatility, we kept the forecast range between 34 percent and 42 percent,” Karahan said.
The governor discussed the steps the bank has taken recently to rein in inflation, noting that the country has entered a period of disinflation. Since last year, the CBRT has hiked its key policy rate to 50 percent from 8.5 percent as officials began to reverse the prior policy of lower rates.
Maintaining tight monetary policy stance
The annual inflation rate slowed below 62 percent in July, marking a sharp drop compared to the June reading and the lowest level registered since October last year.
Explaining the decision to keep the inflation forecast constant, Karahan cited weakening domestic demand and said the medium-term forecasts are “based on an outlook in which the tight monetary policy stance will be maintained until a significant and sustained improvement is achieved in the inflation outlook.”
The governor also mentioned they kept the assumption for food prices intact while marginally lowering the estimates for oil prices this and next year, compared to the second quarterly report.
Macroeconomic outlook in Türkiye
In his opening remarks, he touched upon the wider global picture, noting that some advanced economies have begun to cut rates, while in emerging economies, rate cuts have continued at a slower pace.
Regarding the macroeconomic outlook in Türkiye, Karahan said the composition of growth became more balanced, with net exports making a positive contribution to growth on an annual basis for the first time since the third quarter of 2022.
Rebalancing of domestic demand
Karahan cited that findings from the bank’s interviews with firms also confirm the normalization in domestic demand, and that discretionary spending has decreased, indicating the effectiveness of monetary tightening.
The governor emphasized that the rebalancing of domestic demand will continue as a result of the central bank’s tight monetary policy. He also said that the underlying inflation continues to weaken, and that the bank closely monitors monthly inflation developments.
Macroprudential measures and lira deposits
Karahan mentioned that the year-end inflation expectation of market participants is “slightly above the upper end of the forecast range shared in the previous report,” while households and firms’ expectations are higher than those of market participants. However, he said they envisage that “the expectations of all sectors will decline in tandem with the fall in headline inflation.”
Furthermore, the governor cited macroprudential steps the bank took, such as a monthly growth limit for FX loans and changes in the KKM renewal and conversion targets. He also said that the tight monetary stance has increased interest in Turkish lira assets, with the share of Turkish lira deposits exceeding the year-end target of 50 percent.
Improvement in CBRT’s balance sheet
Karahan also reported an improvement in the CBRT’s balance, with gross reserves increasing by $26.5 billion between March 22 and Aug. 2, 2024, and the net FX position improving by $93.1 billion.
The governor said inflation would decline significantly in the third quarter, also due to the favorable base effect from the last year, and that the bank’s “decisive monetary policy stance will support the downtrend in the monthly underlying inflation amid the rebalancing in domestic demand, the real appreciation in the Turkish lira and the improvement in inflation expectations.”
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