Türkiye's central bank revised its year-end inflation forecast upward for 2024 while maintaining earlier projections for 2025 and 2026, its governor Fatih Karahan announced during the second inflation outlook report of the year Thursday and signaled the readiness to tighten monetary policy further if needed.

Annual consumer inflation is expected to reach 38% this year, up 2 percentage points from the previous forecast, Karahan told a meeting in Ankara.

He said the year-end inflation forecasts for 2025 and 2026 were kept at 14% and 9%, respectively, and inflation is targeted to stabilize at 5% in the medium term.

Karahan stressed that the bank is "determined to maintain its tight monetary policy stance until inflation falls to its target."

"We will definitely not allow a permanent deterioration in the inflation outlook," he underlined.

The governor's latest presentation concurs with an anticipated peak in Turkish annual inflation, likely at over 70% this month before an expected downfall in the summer months.

According to the latest data from the country's statistical office, the annual inflation rate rose to 69.8% in April from 68.5% in March.

The central bank lifted its benchmark one-week repo rate to 50% as of March in a bid to contain elevated inflation.

As part of his opening remarks, Karahan recalled that the primary objective of the Central Bank of the Republic of Türkiye (CBRT) is to achieve and maintain price stability.

"To this end, we have been implementing strong monetary tightening since June 2023," he said.

"We closely monitor price-setting behavior and inflation expectations," he added.

Although underlying inflation declined, Karahan attributed the need for revising the forecast for this year to more resilient than projected demand in the first quarter and the negative impact of the services sector on inflation.

"When we look at global developments, we also see a similar trend in terms of composition. The stickiness of services inflation has been a significant factor slowing the convergence of headline inflation to targets in advanced economies," he said.

During his speech, he highlighted that the bank introduced additional measures to bolster the tightening, in addition to hiking interest rates.

The lower and upper ends of the forecast ranges correspond to 34% and 42% for 2024 and 7% and 21% for 2025, he informed.

Monetary stance

"Our decisive stance in the monetary policy will bring down the underlying trend of monthly inflation through moderation in domestic demand, real appreciation in Turkish lira and improvement in inflation expectations. Thus, we will witness a disinflation period in the remainder of the year, marked by a steady fall in inflation," he explained.

"The moderation in domestic demand will continue with the contribution of tight monetary policy and fiscal policy coordination," he noted.

The governor also said the termination of the scheme for the free use of the first 25 cubic meters of natural gas will add 0.7 points to monthly inflation in May and that inflation will hit the peak in May.

As for the macroeconomic outlook, Karahan referred to the improvement in the foreign trade balance in the second half of last year and said, "We estimate that this rebalancing continued in the first quarter of 2024 and that the current account deficit to GDP ratio declined below 3%."

"We project that the lagged effects of the monetary transmission will lead to a weakening in domestic demand in the second half of 2024, and as a result, the improvement of the current account balance will continue," he added.

Answering the questions, Karahan said that the 36% inflation forecast is still within the band, adding that there are upside and downside risks.

"When we looked at the demand conditions and the main trend of inflation in the first four months, we did not find it right to maintain the 36% target as the base scenario. From now on, we are ready to make additional tightening in case there is a significant and permanent deterioration in the inflation outlook," he said.

The bank’s monetary policy stance and the macroprudential framework will ensure that deposit rates remain at levels that will support the transition to the Turkish lira and boost savings, according to Karahan.

The additional monetary tightening delivered in the March meeting fostered the confidence of residents and non-residents in the Turkish lira and bolstered reserves, he said.

"Due to the steps we took in March, financial conditions have tightened significantly. We observe their impact on loans. We project this to weaken demand, have a positive impact on pricing behavior, and strengthen the disinflation process in the period ahead," noted Karahan.

"When we look at net reserves excluding swaps as of today, we see an additional improvement of $18 billion in the last two weeks. Thus, net reserves excluding swaps increased by a total of $34 billion in this period," the governor noted.