CBRT governor Karahan:  Tight monetary stance to continue until disinflation achieved

Fatih Karahan, Governor of the Central Bank of the Republic of Turkey (CBRT), emphasized during the CBRT’s 93rd Shareholders Assembly that the tight monetary policy stance will continue until inflation significantly and permanently declines, ensuring price stability. He strenghtened his message by openly putting on the table  further rate hikes.

 

A Determined Disinflation Strategy

 

Karahan stated that 2024 marked the beginning of a decisive disinflation process. “We will maintain a tight stance until inflation expectations are anchored and pricing behavior stabilizes. If we foresee a significant deterioration in inflation, we will tighten monetary policy further,” he said.

 

The promise to tighten monetary policy further is a recent addition to CBRT’s arsenal, possibly to assure depositors and foreign investors to  remain in TL assets. Previously, CBRT phrased its policy path as “using all available tools to fight inflation.

 

A large portion of his address was dedicated to explaining the recent developments in  Turkish economy and reasons for mid-cycle tightening.

 

Balanced Growth and Improved External Accounts in 2024

Economic Activity: In the first quarter of 2024, economic activity was strong due to wage adjustments and front-loaded demand. However, tighter monetary policy slowed growth in the following quarters. Annual GDP growth for 2024 came in at 3.2%, driven mainly by the services and construction sectors.

 

Domestic Demand: Household demand rebounded slightly in Q4, but remained broadly balanced across the year. Indicators for early 2025 suggest demand is still higher than desired, reducing its disinflationary impact.

 

Current Account Deficit: Turkey’s current account deficit dropped significantly to $10 billion in 2024, supported by a rise in exports, reduced imports, and a strong services balance.

 

Inflation Trends and Monetary Tightening

Consumer Inflation: After peaking at 75.5% in May 2024, inflation fell sharply, ending the year at 44.4%. By March 2025, annual inflation had eased further to 38.1%.

 

Key Factors: Slower domestic demand, more moderate credit growth, and a limited depreciation of the Turkish lira helped reduce inflationary pressures. Costs from wages and raw materials also declined.

 

Food Prices & Risks: Despite progress, seasonal spikes in food prices and global uncertainties remain key inflation risks.

Policy Rate Movements and Tight Stance

Policy Rate Decisions: The CBRT increased the policy rate to 50% in March 2024. It remained unchanged through November, then gradually declined to 47.5% in December, 45% in January 2025, and 42.5% in March 2025, in line with improving inflation outlooks.

Prof. Demiralp: What are the possible economic scenarios in Turkey after the rate hikes?

Additional Measures: Overnight borrowing and lending rates were adjusted within a ±150 basis point band around the policy rate. These measures enhanced monetary transmission and helped stabilize expectations.

 

Macroprudential Policies for Financial Stability

Credit Limits: Growth ceilings were tightened. FX commercial loans were capped at 0.5% per month, while Turkish lira loan growth was limited to 2.5% for SMEs and 1.5% for other businesses.

 

Required Reserves: Reserve requirements were raised on short-term Turkish lira liabilities to tighten liquidity.

 

KKM Exit Strategy: Steps were taken to phase out FX-protected deposits (KKM) by removing incentives and limiting new account openings.

 

Proactive Response to Market Volatility

In response to volatility in local and global markets in March and April 2025, the CBRT took swift action:

 

Mid-cycle Rate Hike: On March 20, the CBRT held an interim meeting, raising the overnight lending rate to 46% and suspending weekly repo auctions temporarily.

 

April Tightening: On April 17, the policy rate was increased from 42.5% to 46%. Overnight lending and borrowing rates were adjusted to 49% and 44.5%, respectively.

 

Liquidity and FX Measures

Liquidity Tools Expanded: The CBRT extended maturity terms for lira deposit auctions and began issuing liquidity bills up to 91 days.

 

Bond Purchases: Direct bond purchases were initiated to support market functioning.

 

FX Liquidity Management: TL-settled forward FX sales were introduced. The CBRT pledged to actively monitor and manage liquidity conditions.

 

Forward Guidance: No Compromise on Disinflation

Karahan concluded with a firm message: “We will continue using all monetary policy tools decisively within the framework of market rules. We will maintain a tight policy stance until inflation falls permanently and price stability is achieved.”

 

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