In his first public appearance, Governor Fatih Karahan held a press conference to present the first Inflation Report of the year. The BCT maintained its inflation forecasts for the end of the year and 2025, which function as intermediate objectives in the disinflation process, unchanged at 36.0% and 14.0%, respectively. This was the predominant expectation following the bank’s assessment following January’s inflation figures (at 6.7%) that the result was consistent with the forecast in the latest 2023 Inflation Report.
According to the CBT, the change in the underlying trend of inflation and the downward revision of administered prices were offset for this year by upward revisions to forecasts of the output gap, unit labor costs, import prices denominated in TRY and food prices. The impact of monetary restriction on price behavior has been stronger than expected. In contrast, the inflation forecast remained unchanged.
Recognizing inflationary pressures and providing a detailed analysis of the causes, the Governor foresees a transition to the period of disinflation and stabilization. He expects inflation to peak at around 73% in the second quarter of 2024 and then adopt a downward trend.
The BCT predicts that seasonally adjusted monthly inflation will be below 4% on average in the first half of this year (around 3% except in January), which will decrease to less than 2.5% in the third quarter and around 1.5% in the last quarter. The trajectory implies a strong trajectory of disinflation in the second half.
Given this background, the Governor reiterated the messages provided at the January MPC meeting:
- The monetary rigidity necessary to set the course of disinflation is achieved by including quantitative adjustment and simplification measures in the macroprudential framework that also strengthens monetary transmission.
- The current level of official interest rates will be maintained as long as necessary. BTC will look for a significant improvement in the underlying monthly inflation trend and convergence of inflation expectations to the projected forecast range to initiate rate cuts
- Monetary tightening will be re-evaluated if there is a significant deterioration in the inflation outlook, all depending on possible changes in inflation expectations, pricing behavior, public spending, private consumption prospects and wage adjustments. Therefore, the bank maintains its tendency to tighten its rates, although the bar for further increases appears to be high.
Regarding the other topics discussed at the meeting, the Governor:
- They indicated the accumulation of reserves as one of the priorities in their decisions. Despite the recent pressure on reserves due to a growing shift towards currencies from protected currency deposits, BTC expects the positive impact of the monetary tightening process on reserves to continue.
- maintained the focus on a strong sterilization of liquidity through preventive quantitative adjustment measures. Consequently, the bank has absorbed more than TRY 1 billion through mandatory reserve regulations since July 2023, while conducting TRY deposit purchase auctions to sterilize temporary and cyclical excess liquidity.
- He reiterated the commitment to adopt new macroprudential measures in the event of potential excess volatility in credit supply and deposit rates. In this sense, given the recent boost in seasonal spending with credit cards at the end of the year and the advance of greater consumption due to expectations of salary increases, the Governor mentioned the need for new regulation. Furthermore, maintaining deposit rates at a level that supports the liquidation process of the foreign exchange protected deposit system and the share of Turkish lira deposits remains one of the key policy priorities.