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TCMB Governor Karahan: Tight Monetary Policy to Continue Amid Rising Food Price Risks

fatih karahan2

Speaking at the Bosphorus University Finance Summit, Central Bank of the Republic of Turkey (TCMB) Governor Fatih Karahan emphasized that Turkey’s tight monetary policy will continue until lasting price stability is achieved. He reaffirmed the Central Bank’s firm commitment to disinflation and stressed that new risks are emerging in food prices, particularly after recent agricultural weather events.

Karahan noted that the disinflation process that began in June 2024 continues, with core inflation trends declining and service inflation showing a clearer downward path. Goods inflation remains at low levels, and demand rebalancing due to implemented policies has contributed to this improvement. Inflation expectations have begun to moderate, and proactive measures were taken in March 2025 amid volatility in financial markets. Karahan reiterated that these efforts will persist to secure further disinflation.

He attributed ongoing uncertainties in global markets—such as geopolitical tensions, changing trade policies, and technological shifts—as key contributors to macro-financial instability. According to Karahan, these uncertainties are elevating downside risks to global growth and affecting countries differently in terms of inflation.

For emerging markets in particular, Karahan identified key vulnerabilities: high debt levels, elevated inflation pass-through from external shocks, and greater exposure to international financial volatility. He stated that global inflation during 2022–2023 severely affected inflation expectations in developing economies more than in advanced ones. The result was a higher sensitivity to global shocks and cost-push inflation.

Karahan discussed the need for emerging economies to diversify monetary policy tools beyond traditional interest rate mechanisms. Since the 2008–2009 global financial crisis, central banks have increasingly relied on supplementary instruments like foreign exchange interventions and macroprudential policies to maintain financial stability. In Turkey’s case, Karahan grouped these instruments into three categories: measures to increase the share of Turkish lira (TRY) deposits, regulations to manage credit growth, and liquidity management operations.

Karahan confirmed that TRY deposits are being promoted at the expense of foreign-currency-protected accounts (KKM), and the transition has occurred without posing risks to financial stability. Currently, the share of TRY deposits stands at 58%, which is close to its historical average. Over the past year, only 14.5% of maturing KKM accounts converted back to foreign currency, suggesting growing confidence in the lira.

On reserves, Karahan shared that Turkey’s gross foreign reserves rose from $124 billion in March 2024 to $171 billion by mid-March 2025, before declining to $139 billion in early May. Net reserves excluding swaps improved from -$65 billion to $66 billion in the same period, although they recently dropped to around $14 billion. He clarified that 70% of recent forex demand originated from foreign investors, not domestic entities.

Karahan stated that recent rate hikes have passed through to deposit and loan interest rates, supporting TRY-based savings and reducing credit-driven inflationary pressure. Although consumer credit recently showed some acceleration, this was largely due to credit card usage rather than broader credit expansion. Key consumption indicators, including retail sales and card expenditures, point to a domestic demand that is moderating but still somewhat resilient.

Regarding inflation data, Karahan reported that headline inflation indicators suggest annualized rates are just above 30%, confirming continued disinflation. However, food inflation remains a concern. Although food prices rose during March due to Ramadan and softened slightly in April, a recent nationwide frost event has introduced upside risks, particularly for fresh produce.

On the services front, inflation increases were more limited. Karahan said that cost-driven pressures on consumer prices have started to ease and are now broad-based across sectors. Policy actions and headline inflation declines have led to falling inflation expectations, although improvements stalled in April due to recent financial market developments.

He emphasized that monetary policy must remain tight and consistent, especially as inflation expectations are still above the Central Bank’s disinflation trajectory. Global commodity prices are helping by staying moderate, and foreign demand remains weak. Domestic demand is also cooling due to monetary tightening.

Karahan concluded by reaffirming that tight monetary policy will persist until inflation declines sustainably and price stability is firmly established. He framed this effort as essential not only for stabilizing the economy but also for enabling long-term, sustainable growth and societal prosperity.

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