CBRT Governor Karahan: We will continue the tight monetary policy with determination

CBRT Karahan made a presentation at the "Economy Meeting" event organized by the Young Businessmen Association of Türkiye (TÜGİAD) Ankara.

Stating that price stability improves the investment and production environment by facilitating long-term planning, Karahan said, "Supply-side shocks continue to affect the inflation outlook, especially through energy prices. These pressures limit the improvement in headline inflation. On the other hand, the slowdown in domestic demand under the influence of our tight monetary policy supports disinflation." he said.

Pointing out that the decrease in inertia in services, especially rent, also contributed to this process, Karahan said, "Under this outlook, the main trend of inflation has declined recently. We are closely monitoring economic developments with a wide data set. We focus on the medium-term inflation outlook by evaluating the main trend of inflation, demand conditions and expectations together. We maintain our cautious stance against the upside risks on inflation. We will resolutely maintain the monetary tightness required by disinflation until price stability is achieved." he said.

Stating that oil prices, which were around 70 dollars at the beginning of the year, decreased slightly after recording significant increases from time to time compared to the pre-war period, Karahan said that oil prices are still significantly above the pre-war level, and that in addition to the rise in oil prices, the increase in refinery margins strengthened the pressures arising from energy prices, especially diesel. Karahan stated that natural gas prices, which have risen again recently, have nearly tripled their pre-war level, and pointed out that these developments negatively affect inflation directly through energy prices and indirectly through items such as transportation services.

Karahan, on the other hand, pointed out that the Ecel mobile system limited the reflection of the sharp price increases in the country, especially in the first months of the war, and explained that it also limited the primary effects of the easing of cost pressures on inflation in items such as transportation, where fuel is an important input.

"IF SUPPLY-SIDE PRESSURE FADES, DISINFLATION WILL CONTINUE IN THE NEXT PERIOD"

Stating that they took measures to support the tight monetary policy at the beginning of March with the beginning of the war, Karahan continued as follows:

"Thus, we aimed to limit the secondary effects that the shock may have on inflation through expectations and pricing behavior. As a result of the policy steps taken in coordination, inflation started to decline again after May. As a reflection of the increase in energy prices again, the decline in annual inflation lost momentum in the recent period. However, while annual consumer inflation remained close to horizontal in October, the decline in B and C indicators, which exclude products such as energy and unprocessed food, continued. This outlook indicates that the improvement in other items continues while energy-related pressures continue."

Karahan stated that the main trend, which rose to 30 percent during the war period in annualized terms, points to 23.7 percent as of October, and said, "This level is approximately 6 points below the current annual inflation. The fact that the main trend is below the annual inflation indicates that disinflation will continue in the coming period if the supply-side pressures are alleviated. We evaluate this development as a reflection of the effects of our tight monetary policy stance on demand and pricing behavior." made his evaluations.

Emphasizing that as of October, annual inflation in main groups other than energy was below last year, Karahan said that due to the effect of the war, annual energy inflation increased to 51.4 percent, approximately 17 points above last year. Stating that the loss of momentum in the disinflation process this year is mainly due to the impact of geopolitical developments on energy prices, Karahan said, "Service sub-items exhibit different tendencies depending on sensitivity to demand conditions, tendency to index to past inflation and the level of being affected by geopolitical developments." he said.

"THE CURRENT OUTLOOK INDICATES THAT THE DECLINE IN RENTAL INFLATION WILL CONTINUE"

Karahan underlined that they saw a significant slowdown in rent inflation, where inertia was strong in the past, and made the following statements:

"Rent inflation decreased from 66 percent the previous year to below 40 percent in October this year. Education services, another item where rigidity is an important factor, also continued to decline. On the other hand, annual inflation in transportation services was 42.5 percent with the indirect effects of increasing energy prices. Thus, transportation services inflation was above both last year's level and this year's general services inflation. Communication services inflation also increased by 20 points compared to last year, reaching 43 percent, which pushed services inflation up. "The slowdown in rent inflation stands out in the decline in services inflation. The current outlook indicates that the decline in rent inflation will continue."

Explaining that the price increases in basic goods, which gained strength in April due to geopolitical developments, slowed down in the following months, Karahan said that the near-term trend also fell below the annual basic goods inflation. Stating that the slowdown in consumption demand due to tight monetary policy and the moderate course of the Turkish lira limited the increase in core goods inflation despite supply-side pressures, Karahan said, "Food inflation, which remained high in the first months of the year and was effective in slowing down the disinflation process, decreased last year with the recovery in agricultural production affected by adverse weather conditions. However, food prices follow a volatile course due to fresh fruits and vegetables. As a matter of fact, the effect of fresh fruit and vegetable prices came to the fore on the course of consumer inflation in October. In the coming period, the climate change "Depending on conditions, volatility in food prices may continue." he said.

"OUR TIGHT MONETARY POLICY LIMITED THE DETERIORATION IN EXPECTATIONS"

Karahan pointed out that supply-side developments, especially energy prices, the course of demand conditions and expectations will come to the fore in the course of inflation, and explained that upward risks continue in energy and non-energy commodity prices. For this reason, emphasizing the importance of domestic demand conditions continuing to support the disinflation process, Karahan said, "National income data for the first half of the year and indicators for the near term point to a weak course in domestic demand. Excluding gold, we see that the growth of retail sales slowed down in the third quarter as of August. The near-horizontal course of card expenditures in the third quarter also confirms this slowdown in demand. Inflation expectations are important in terms of the reflection of supply shocks on pricing behavior and the permanence of their effects. Our tight monetary policy is in line with expectations." limited degradation.” he said.

Stating that household expectations, after increasing slightly in the first months of the year, decreased and remained below the pre-war level, Karahan said, "However, the improvement in expectations that we predicted at the beginning of the year has not yet been achieved. This outlook continues to pose a risk in terms of disinflation and requires us to maintain our cautious stance." he said.

"WE CLOSELY FOLLOW THE INTERACTION OF DEVELOPMENTS IN THE FUND MARKET"

Karahan touched on the impact of energy prices and geopolitical developments on the current account balance, as well as inflation, and emphasized that the foreign trade deficit, excluding gold and energy, remains more moderate. Stating that despite the negative impact of increasing energy prices resulting from geopolitical developments, the current account deficit follows a nearly horizontal course as a ratio of national income, Karahan continued as follows:

"The slowdown in domestic demand, the preservation of the strength of tourism revenues and the improvement in the gold foreign trade balance support the current balance. In line with these developments, we predict that the ratio of the current account deficit to national income will be below the long-term average in 2026. We closely follow the interaction of the developments in the fund market with the banking system and other financial markets. Price stability and financial stability are two elements that complement each other. In this context, we reviewed the liquidity opportunities, taking into account these developments in the financial markets. We increased the amount of funding we provided through weekly repo auctions. "We updated the borrowing limits of banks in the money market. We reduced the collateral discount rates. We also made changes in the required reserve application in order to support macrofinancial stability and banks' liquidity management. We provided flexibility to banks in liquidity management by reducing the blocked facility rates in Turkish lira required reserves."

Stating that another regulation is aimed at liquidity developments that may occur in the private sector bond market, Karahan said:

"The most important demand for these instruments came from investment funds. Recent outflows in funds reduced the demand for private sector debt instruments. This created a risk in refinancing. In order to prevent this risk, we exempted loans for the redemption of private sector bonds from the growth limit. Thus, we provided convenience to companies in liquidity management. From now on, we will continue to closely monitor financial stability and liquidity conditions and take any additional measures proactively if deemed necessary. When we look at the portfolio preferences after the recent fund market developments, we exempted the loans for the redemption of private sector bonds from the growth limit. "And we see that confidence in the Turkish lira remains strong."

"TURKISH LIRA DEPOSITS ARE INCREASING STRONGLY"

Karahan underlined that Turkish lira deposits increased strongly due to the tight monetary policy stances, the supportive macroprudential tool set and the effects of these measures, and stated that they saw a limited increase in foreign currency deposits in the corporate sector, along with a fluctuating course. Stating that they saw the impact of these developments in the stable course of the Turkish lira share, Karahan said, "Especially from the second quarter onwards, the share of Turkish lira deposits was above 60 percent, with the acceleration of the transition to Turkish lira deposits. With the recent outflows from money market funds being largely directed towards Turkish lira deposits, the Turkish lira share continues to remain above 61 percent."

Pointing out that gross reserves, which were 210 billion dollars on February 27, decreased to 158 billion dollars as of October 30, Karahan stated that 30 billion dollars of the decline in reserves after February 27 was due to the decrease in gold prices.

Karahan pointed out that price stability is an important prerequisite that will pave the way for sustainable growth and a healthy investment environment, and said that recent data confirm the decline in the main trend of inflation with the effect of tight monetary policy. Explaining that geopolitical developments keep upside risks alive, Karahan said:

"For this reason, we will continue to be cautious to ensure the continuation of our gains in disinflation. In this regard, I would like to emphasize that we will continue the necessary tight monetary policy stance until price stability is achieved."