Fatih Karahan tries to soothe investors

CBRT’s Karahan Signals Commitment to Strong TL Policy

Central Bank Governor Fatih Karahan said Türkiye’s foreign exchange reserves are significantly stronger than in previous crisis periods, while highlighting ongoing disinflation. However, rising energy prices and global uncertainty are keeping the door open for a potential rate hike at the April 22 policy meeting.

Inflation Declines Across All Categories

Central Bank of the Republic of Türkiye (CBRT) Governor Fatih Karahan said inflation has fallen sharply over the past year.

• Headline inflation declined from 75.5% in May 2024 to 30.9% in March 2025
• Disinflation continued across all major categories

Key breakdown:

• Services: 56.3% → 40.6%
• Food & non-alcoholic beverages: 37.1% → 32.4%
• Core goods: 19.4% → 16.1%
• Energy: 42% → 34.2%
• Alcohol, tobacco & gold: 44.5% → 32.8%

Karahan noted that the underlying inflation trend also eased in March, supported by slower increases in rent and education costs.

Rent and Education Inflation Show Improvement

• Rent inflation fell from 91.8% to 52.4%
• Education inflation declined from 80.4% to 52%

These categories had previously been among the most persistent contributors to inflation.

Energy Shock Managed via “Sliding Tax” System

Following the escalation of the Iran war on February 28, Türkiye introduced a fuel tax adjustment mechanism (“eşel mobil”) on March 5.

The system:

• Automatically adjusts fuel taxes based on oil prices and exchange rates
• Helps limit pass-through of external energy shocks to domestic inflation

Karahan emphasized that this mechanism has played a key role in containing inflationary pressures.

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Economic Activity Shows Signs of Slowdown

Demand indicators point to weakening economic momentum:

• Declines in automobile sales and white goods demand
• Lower card spending
• Weakening forward-looking order expectations

Additional indicators:

• Capacity utilization remains subdued
• Credit growth slowed to 30.7% in Q1

Current Account and FX Demand Trends

Karahan noted that the current account deficit remains:

• Driven by energy imports and tourism revenues
• Still below historical averages

He also highlighted rising demand for:

• Gold and foreign currency, partly due to global gold price increases

Reserves Stronger Than Previous Crisis Periods

A key message from Karahan was the improvement in Türkiye’s reserves:

• Gross reserves: $123 billion (March 2024) → $171 billion (March 2025)
• Net reserves (excluding swaps): –$65 billion → +$31 billion

He stressed that reserve buffers are now significantly stronger than in past periods of stress.

Iran War and Geopolitical Uncertainty Stresses Turkish Economy

Investors See Possible Rate Hike

During meetings in London, Karahan and Finance Minister Mehmet Şimşek told investors they are confident in current policies but remain flexible.

According to market participants cited by Reuters:

• A rate hike at the April 22 Monetary Policy Committee meeting is seen as possible
• Especially if energy prices remain elevated

Current policy stance:

• Policy rate held at 37%
• Overnight rate increased toward 40%
• Significant FX and gold reserve interventions to support the lira

Market Expectations Point to Tightening

Money markets are pricing in:

• Around 300 basis points of tightening, potentially lifting rates to 40%

However, policymakers signaled:

• No urgency to act immediately
• Strong commitment to prevent currency depreciation

Inflation Risks Remain Elevated

Despite progress in disinflation:

• Rising energy prices are pushing inflation expectations higher
• Türkiye’s dependence on energy imports remains a key vulnerability

CBRT website, BloombergHT, Reuters