Karahan: Tight Stance to Remain Until Price Stability Achieved

Fatih Karahan, Governor of the Central Bank of the Republic of Turkey (CBRT), reaffirmed that the institution will maintain its tight monetary policy stance until price stability is fully achieved. Speaking in an English-language presentation titled “Monetary Policy and Macroeconomic Outlook,” Karahan emphasized that additional tightening steps could be introduced if inflation deviates significantly from projections.

His remarks signal both determination and flexibility, underscoring that the central bank is prepared to act decisively against inflationary pressures while remaining guided by economic data.

Reinforcing the Disinflation Path

Karahan highlighted that the existing tight policy is designed to strengthen the disinflation process—the sustained decline in inflation—through multiple channels.

“The current tight monetary policy will reinforce disinflation through demand, exchange rate, and expectations channels,” he explained.

He also pointed to the importance of Turkey’s Medium-Term Program (OVP), noting that the broader macroeconomic framework laid out in the plan would support monetary policy in delivering lasting improvements in price dynamics.

This alignment of monetary and fiscal strategy is viewed as crucial for building investor confidence, ensuring credibility, and creating a stable environment for long-term growth.

Policy Rate Decisions Guided by Inflation Outlook

Karahan underlined that future decisions of the Monetary Policy Committee (MPC) will be driven primarily by inflation data.

• Both realized and expected inflation will play a role in determining the policy rate.

• The bank will continue to adjust interest rates to ensure that the tightness required by the disinflation path is achieved.

• Interest rate moves will be reviewed cautiously at each MPC meeting, ensuring decisions reflect the latest economic developments.

This approach highlights the CBRT’s data-driven strategy and its commitment to transparency in policy-making.

Scope for Additional Tightening

In a clear warning to markets, Karahan stated that further tightening would be implemented if inflation outcomes diverge materially from projections:

“If there is a significant deviation in the inflation outlook from our forecast path, we will further tighten the monetary policy stance,” he said.

This statement reinforces the CBRT’s message that it will not hesitate to act preemptively if inflationary risks re-emerge, aligning with global central banking practices where credibility hinges on swift and decisive interventions.

Anchoring Expectations and Building Confidence

One of the central themes of Karahan’s message is the importance of anchoring inflation expectations. High inflation in Turkey has historically eroded purchasing power and confidence in the lira, creating a cycle of dollarization and market instability. By signaling firm commitment, the CBRT aims to:

• Stabilize exchange rate dynamics, reducing currency-driven inflation.

• Curb excessive domestic demand, aligning consumption with sustainable supply.

• Strengthen confidence among households and businesses, ensuring they base decisions on stable, long-term expectations rather than short-term volatility.

Contribution of the Medium-Term Program

Karahan stressed the role of the Medium-Term Program (OVP), which sets out Turkey’s economic strategy for the coming years. He argued that the OVP’s macroeconomic framework complements monetary policy, providing a consistent and credible path toward achieving inflation targets.

This synergy is expected to enhance policy effectiveness, particularly in the context of attracting foreign investment, stabilizing the currency, and improving Turkey’s international credit outlook.

A Balancing Act for Growth and Stability

While the message remains clear that price stability is the top priority, Karahan also acknowledged the broader economic context. Tight monetary policy often slows economic activity in the short term, but officials argue that it is a necessary condition for sustainable growth.

By curbing inflation, Turkey aims to build a foundation for long-term investment, productivity, and employment growth, rather than short-lived booms followed by financial instability.

Market and Investor Reactions

The CBRT’s strong stance has been closely monitored by both domestic and international markets. Analysts suggest that Karahan’s comments are intended to reassure investors that Turkey’s central bank remains committed to orthodox monetary policy principles, even in the face of political and social pressures.

Maintaining consistency between statements and actions will be key in restoring credibility and ensuring that inflation expectations decline over time.