The Turkish central bank preserved its earlier shared inflation forecast for the end of this year on Thursday, as it expects that domestic demand will continue weakening due to the monetary policy, its governor said while presenting the quarterly report.
Annual consumer inflation is expected to reach 38% this year, Central Bank of the Republic of Türkiye (CBRT) Governor Fatih Karahan told a briefing in Ankara, held to release the bank's third inflation report this year.
The monetary authority also kept the estimates unchanged for next year, at 14% and 9% for 2026, as announced in its previous report earlier this year. The unchanged projection came after the central bank kept its policy rate on hold for four consecutive meetings.
"As we approach the year's end, the forecast range corresponding to 2024 should have narrowed down mechanically. However, given the mounting uncertainties amid recent geopolitical developments and global financial volatility, we kept the forecast range between 34% and 42%," Karahan said.
The governor touched upon the steps the bank has undertaken recently to rein in inflation, recalling that the country has entered a period of disinflation.
Since last year, the CBRT has hiked its key policy rate to 50% from 8.5% as officials began to reverse the prior policy of lower rates.
The annual inflation rate slowed below 62% in July, which marked a sharp drop compared to the June reading and the lowest level registered since October last year.
Explaining the reasons behind the decision to keep the inflation forecast constant, Karahan cited a weakening domestic demand and said that the medium-term forecasts are "based on an outlook in which the tight monetary policy stance will be maintained until a significant and sustained improvement is achieved in the inflation outlook."
The governor also said they kept the assumption for food prices intact while marginally lowering the estimates for oil prices this and next year, compared to the second quarterly report.
In his opening remarks, he touched upon the wider global picture, mentioning that some advanced economies have begun to cut rates.
"Faster cutting cycles are being priced across advanced economies, particularly in the U.S. In emerging economies, however, rate cuts have continued at a slower pace," he noted.
However, the governor said that central banks continue to communicate that they will maintain the necessary monetary tightness until permanent disinflation is established and will continue to cut rates cautiously.
Referring to the macroeconomic outlook in Türkiye, Karahan started by evaluating the domestic demand from the first quarter onward, recalling that in the first three months of the year, the annual contribution of domestic demand to economic activity declined, albeit still remaining high.
He also noted that in this period net exports made a positive contribution to growth on an annual basis, for the first time since the third quarter of 2022.
Thus, the composition of growth became more balanced, he said. Data for the second quarter also suggests a slowdown in domestic demand, according to the governor, with retail and trade sales volume indices implying a quarterly decline.
The governor also cited that findings from "our interviews with firms also confirm that normalization in domestic demand continues."
"The level of card spending is high, yet it has remained relatively flat in the recent period," he added. Moreover, he cited that non-discretionary spending on items such as food, clothing and meals remained flat.
"On the other hand, recently, discretionary spending such as jewelry, electronics and car rental has decreased," he said, adding that monetary tightening has been effective, particularly in terms of discretionary spending.
Discretionary spending is a nonessential expense that is incurred by an individual, household or business.
"Accordingly, we assess domestic demand to have slowed down in the second quarter, albeit still remaining at an inflationary level," said Karahan.
"Here, I would like to emphasize that the rebalancing of domestic demand will continue as a result of our tight monetary policy."
Evaluating the inflation data, the governor said that the annual inflation, which peaked in May, has dropped in the subsequent two months. He also said that in addition to annual inflation, "we also closely monitor monthly inflation developments," adding that, "The recent trends in various indicators suggest that the underlying inflation continues to weaken."
Karahan also said that consumer inflation increased temporarily in July due to factors such as administered prices and tax adjustments – reiterating the message the central bank and authorities conveyed before.
"We estimate the impact of these factors on monthly consumer inflation to be 1.4 points," he noted.
Monthly price growth, the preferred gauge of the CBRT, rose to 3.23% in July. In June, monthly inflation was 1.64%.
Pointing out that the year-end inflation expectation of market participants is "slightly above the upper end of the forecast range shared in the previous report," the governor mentioned that households and firms are higher than those of market participants.
However, he said they envisaged that "the expectations of all sectors will decline in tandem with the fall in headline inflation."
Furthermore, among macroprudential steps the bank took, Karahan cited measures such as a monthly growth limit for FX loans and changes in the KKM renewal and conversion targets.
"The tight monetary stance that we have decisively pursued has increased interest in Turkish lira assets," said the governor.
"While the share of Turkish lira deposits has increased since March, exceeding our year-end target of 50%, the share of FX-protected deposits declined to 11%."
Moreover, he said that rating upgrades by credit rating agencies supported the external financing outlook and despite being volatile due to geopolitical developments, the risk premium also maintained its moderate course.
The governor also reported an improvement in the CBRT's balance as gross reserves increased by $26.5 billion (TL 887.72 billion) between March 22 and Aug. 2, 2024, while the net FX position improved by $93.1 billion.
Providing details about inflation expectations, Karahan said inflation would decline significantly in the third quarter owing also to the favorable base effect from the last year.
"Our decisive monetary policy stance will support the downtrend in the monthly underlying inflation amid the rebalancing in domestic demand, the real appreciation in the Turkish lira and the improvement in inflation expectations."
