Karahan: We Will Maintain Tight Monetary Policy Until a Lasting Decrease in Inflation is Achieved
The Central Bank of Turkey President Dr. Fatih Karahan stated that the tight monetary policy stance would continue until a significant and permanent decrease in the main trend of monthly inflation is achieved and inflation expectations converge towards the predicted forecast range.
In his speech at the ISO December Council Meeting, Karahan mentioned:
"Our disinflation process is ongoing. Consumer inflation declined to 48.6% in October, marking a substantial decrease compared to the peak in May. We expect inflation to fall to 44% by the end of the year.
Although the main trend of inflation is improving, it is slower than we anticipated. This development is influenced by low core goods inflation and visible improvement signals in the services sector inflation. The rapid decline in inflation during the summer months due to base effects is expected to continue as monthly inflation improves in the period ahead. By the end of 2025, we aim to reduce inflation to 21%.
Macroeconomic indicators are progressing in line with the disinflation process. Core goods inflation maintains its low trajectory, driving the mentioned slowdown in the main trend. Improvement signals in services inflation are also becoming more pronounced. We observe a gradual improvement, particularly outside of rental components.
On the other hand, looking at groups outside the core category, we saw a strengthening of energy price increases in the third quarter. This development was influenced by price changes in managed energy items, as well as the effects of fixed tax updates.
In terms of food, following improvements in the third quarter, we witnessed significant price increases in unprocessed food due to temporary supply conditions in October. This trend is continuing into November. Meanwhile, food inflation, excluding fresh fruits and vegetables, remains lower.
When closely examining services inflation, the high level observed in the third quarter was sustained primarily by rent and education, which are characterized by strong historical indexing in pricing and are subject to price increase limitations. The back-to-school effect was particularly evident in services inflation during the third quarter. With the completion of back-to-school season, relative price adjustments in the mentioned groups were largely finalized.
We deem it healthier to analyze the dynamics of service prices in terms of rent and non-rent categories. Rents, due to reasons such as earthquakes, urban transformation, and rent increase limitations, should be treated separately as they involve structural aspects.
Given these factors, we assess that the inertia in rental inflation is higher than our forecasts. However, we observe that services excluding rents are slowing more significantly. Preliminary indicators from the retail payment system for November suggest that monthly rental inflation will slow in the last quarter.
Our firm stance on monetary policy will continue to drive down the main trend of monthly inflation through balancing domestic demand, real appreciation of the Turkish lira, and a correction in inflation expectations. Additionally, we believe that the increasing coordination of fiscal policy will significantly contribute to this process.
In the second quarter, the contribution of domestic demand to annual growth notably decreased, while net exports continued to contribute positively to growth. During this period, domestic demand contributed 1.2 points to growth, while net exports contributed 1.3 points. Thus, the demand composition in growth displayed a more balanced appearance. We expect this trend to continue in the third quarter data, which will be announced on Friday.
Current data for the third quarter indicates that moderate trends in domestic demand have persisted. During this period, retail sales experienced a slight increase compared to the previous quarter. However, a more detailed examination of retail sales reveals that, excluding gold, growth is more moderate.
The services production index also points to balancing in domestic demand. In addition to these indicators, information we obtained from firm consultations confirms the slowdown in domestic demand. Demand indicators for the fourth quarter suggest that conditions are supportive of a decline in inflation.
Indicators calculated using different methods show that the output gap, which decreased in the third quarter, is expected to continue its decline into negative levels in the fourth quarter. I would like to emphasize that as a result of our tight monetary policy, the balancing in domestic demand will continue. In the upcoming period, the negative output gap will be an important component of the disinflation process.
We also observe that improvements in the foreign trade balance continue in line with the balancing of domestic demand. Recently, when excluding gold and energy, exports have maintained their strength while imports have remained moderate. We anticipate similar trends to continue.
The course of inflation expectations is crucial concerning the speed and cost of disinflation. We are determined to ensure that expectations form in a way that will contribute to the disinflation process with our tight monetary policy stance. Market participants' expectations remain at relatively lower levels.
Households' and the real sector's inflation expectations also continue to improve. Alongside our firm stance on monetary policy, we expect the improvement in expectations to continue due to the decline in headline inflation.
The main trend of producer inflation maintains a moderate course. As of October, when annualized, the main trend of manufacturing industry inflation stands at 19.7%, significantly below the current annual producer inflation of 32%.
Therefore, pressures from producer prices on consumer inflation are weakening. This situation has a positive impact on the goods inflation in the CPI. We have observed a clear improvement in the pricing behavior of industrial firms.
When examining domestic sales price expectations within the manufacturing sector, the proportion of firms planning to increase prices among those expecting rises in both domestic demand and unit costs is on a declining trend.
We have kept the policy interest rate, which we raised to 50% in March, stable for eight months. We will maintain our tight monetary policy stance until a significant and permanent decrease in the main trend of monthly inflation is achieved and inflation expectations converge towards the predicted forecast range.
In this regard, we will set the level of the policy interest rate to provide the necessary tightness required by the anticipated disinflation process, taking into account inflation realizations and expectations."