Turkey’s central bank Governor: Time has come to switch back to Turkish lira

Central Bank of Turkey Governor Hafize Gaye Erkan stated, “We believe the time has come for the transition to the Turkish lira. We see the most direct reflections of this in deposit developments.”

Speaking at the Joint Meeting of Istanbul Chamber of Industry Vocational Committees, Erkan mentioned that predictability has increased in the markets along with a significant rise in the central bank fx reserves. She said, “In the recent period, the increase in reserves has been influenced not only by Gulf countries but also by Western fund inflows.”

Erkan also stated, “In the upcoming period, by making the increase in our reserves permanent, we will support the development of foreign demand for Turkish lira assets.”

In her speech, Erkan stated, “During the disinflation period, while headline inflation begins to decline in addition to the main trend, exchange rate stability, improvement in the current account balance, permanent strengthening in capital flows, and an increase in reserves will continue. The disinflation period will be followed by a stability period where predictability will increase, inflation will reach single digits, and a period of stability will follow where the decrease in inflation will be achieved permanently, alongside quality growth.”

Regarding the inflation path, Erkan emphasized that the trio of “perception, acceptance, and reputation” is a crucial tool and facilitating factor for inflation to settle on this path. She said, “If you evaluate us based on what we have done and are doing and reinforce your belief in this path, it will be possible for us to place inflation on this path and achieve disinflation with minimum cost. While we are determined to put inflation on this path, even if it involves higher costs for various reasons, if the trio of ‘perception, acceptance, and reputation’ does not come into play, we are determined and resolute.

Governor Erkan on observations and inflation outlook

Erkan recalled that, after the rise in inflation, signs of improvement in expectations began to appear as the effects of policy decisions came into play. She continued:

“The improvement in expectations about what inflation will be is reflected in price formation. Indeed, there have been positive developments in pricing behavior in product groups more affected by monetary policy, such as automobiles, white goods, and furniture. The rate of price increases in these product groups, which are more affected by monetary policy, not only decreased but also started to see discounts for the first time in a long time. It is quite pleasing that companies have started to reduce prices by seeing that the excessiveness in demand is receding, both for consumers and the competitive environment. With the steps we have taken, especially in big cities, we observe significant signs of slowdown in the price increases in rental property listings. As the monetary transmission continues, these observations will become more widespread. Under the overview I summarized, there has also been a decline in the main trend of inflation. The leading indicators for November also indicate that the monthly inflation will continue to slowdown.”

The process of declining inflation will manifest through various channels

Erkan, mentioned that annual inflation will reach its peak in May due to the base effect, will decline in the second half of 2024 after the peak. She mentioned that beyond the base effects, the process of declining inflation will manifest through various channels, and two significant developments will become widespread during this process.

Listing these developments, Erkan stated:

Firstly, the part that the consumer makes to prevent the depreciation of their income and constitutes the excessiveness in consumption will disappear. The same trend will lead to a slowdown in the pressure on gold, foreign exchange, and real estate prices. Secondly, with the contribution of exchange rate stability, shocks on monthly inflation will decrease, and predictability regarding costs will increase.”

During this process, in addition to product groups, pricing behaviors in service groups, such as transportation and food services, which reflect cost developments more quickly, will also normalize. We will transition from a period where prices are changed every week or two to a period where prices will remain valid for a longer time during the disinflation process. This will lead to a noticeable decline in the main trend of inflation.”

“Slowing inflation will be felt in producer and consumer prices in the second quarter”

TCMB President Erkan stated that, due to its structure, as headline inflation recedes, a more gradual slowdown will be observed in items such as rent and education, where prices are updated once a year, and disinflation in these types of items will become more noticeable by the end of 2024 and in 2025.

Emphasizing that the increase in real estate prices, which they have seen starting to lag behind inflation and the horizontal trend in new rental prices will contribute to the further improvement of inflation expectations along with the exchange rate, Hafize Gaye Erkan said, “As a result, we anticipate that the slowdown in inflation, which develops at different speeds in different sectors, will become more general in the second quarter of the year and will be felt in both producer and consumer prices.”

“We expect credit growth to be at the right pace and in the right composition”

TCMB President Erkan also made evaluations regarding growth dynamics.

Erkan stated that Turkey has reached a point where it needs to focus on the quality of growth after the economic development process it has gone through, and high and volatile inflation is the most important obstacle in front of it. In this context, she emphasized that they see the process of balancing demand as key to the sustainable development of the economy.

Erkan said, “Economic actors who make choices between investment, consumption, and savings are forced to turn to a shorter-term perspective when relative prices show volatility. This reduces the stability and continuity required for long-term decisions, thereby posing a risk to efficiency increases in the economy and resource distribution. Predictability in inflation will increase, providing the long-term resources needed for the potential of our industry to be achieved. Thus, we aim for the contribution of real sector investments and technological adoption to economic growth to increase permanently. Throughout this process, we expect credit growth to be at the right pace and in the right composition. With a strategic perspective, by calibrating monetary tightening correctly in terms of both access to finance and financing costs, we are taking measures required to be in line with disinflation.”

“Misconception that inflation is the cost of high growth is wrong”

Erkan emphasized that the misconception that inflation is the cost of high growth seriously hinders the sustainability of growth, especially above certain inflation threshold levels, and stated:

“Therefore, price stability and the financial stability that will be strengthened with it are indispensable for sustainable growth. However, the misconception and concerns that disinflation will inevitably occur at the expense of growth in every condition and situation are sometimes expressed in the public opinion. However, in cases where inflation is high and volatile, a disinflation process can be initiated with minimal concessions from growth until inflation falls to certain threshold values with ‘correct’ policy designs. The trade-off between growth and inflation will only come into play at threshold values reached after the ‘excess’ in inflation is eliminated. At this point, the goal should be to continue the disinflation process steadily. Although this stage corresponds to a more challenging disinflation process, there is no inflation problem that cannot be resolved with correct policy designs and sufficient credibility. We are aware that it will take some time for the effects of our monetary policy steps to fully emerge. On the other hand, I would like to express that we have begun to observe the positive effects of these steps strongly.”

“We evaluate that our policy measures provide sufficient financial tightness in loans”

Pointing out that the 4-week growth rates have decreased from the peak of 7.4% at the beginning of April to around 2.1% as of November 17 in individual loans, Erkan said:

“While this rate decreases to 1.4% in vehicle loans, it remains relatively flat at around 1.3% in consumer loans. Individual credit cards, which are used both for consumption and as a borrowing tool, are relatively high at 4%, but are moving towards a more moderate path. This is natural in the course of the development of the economy. We evaluate that our policy measures provide sufficient financial tightness in loans. At this point, I would like to share with you that there will be no change in the maximum interest rates on individual credit cards and the maximum commission rates at member merchants after our latest decision. While extravagance and excess leading to inflation are eliminated in individual loans, commercial loans continue to contribute to production capacity by showing continuity. After the acceleration seen in the first half of 2023, commercial loan growth came to a standstill at the end of May. Both the excess before and the sudden stop after are not healthy for both our companies and the banking system. In light of this evaluation, we quickly took action to restore the functioning of the market mechanism. Thus, with the recovery of the flow of loans in Turkish lira to the real sector, commercial loan growth has reached a balanced and continuous structure. The improvement in the functionality of the credit market mechanism is also evident in the distinction between private and public banks. Private banks have also taken an active role in commercial loan growth.”

Erkan also reported that before June, commercial loans were predominantly allocated to SME segment firms, and in recent months, there has been a normalization in this distribution.

Stating that corporate firms increased their share in commercial credit use while improving access to finance, Erkan said, “Investment and export loans, which came to a standstill in May-June, showed a recovery, increasing by more than six times in the July-September period.” used the expressions.

Erkan also stated that a significant increase was observed in rediscount and investment-commitment advance loans provided through the CBRT during this period. Reminding that rediscount and investment-commitment advance loans make a significant contribution to the commercial loan composition in the desired direction, Erkan said, “With the updates made in the daily usage limits of export and foreign exchange-generating service rediscount loans on July 21 and September 12, daily limits were increased to 3 billion lira, 10 times higher than the previous level.” made the assessment.