Speaking at a Peterson Institute panel in Washington DC, Karahan said that it’s not been easy convincing markets of policymakers’ commitment to curb inflation.
“We have done a lot and ready to do more to regain credibility and re-establish the policy rate as the primary tool,” he said.
Karahan asserts that current monetary tightening is sufficient to reach Bank’s inflation projections for end-2024 with a 3 mth lag, based on Bank’s monthly survey of market expectations, but: “MPC members are monitoring the incoming data to evaluate whether the CBRT’s current stance is appropriate”.
Headline inflation in Turkey is on track to exceed 70% by May, the nation’s central bank Governor Fatih Karahan said Tuesday, citing managing expectations as one of the main challenges.
Karahan, who was elevated from deputy governor to governor in February, also pointed to high demand and high inflation expectations as other challenges. These are “making the investment climate not so favorable,” he said.
A comprehensive tightening program that last saw the benchmark interest rate raised to 50% in March is helping normalize demand, he said, and added that the country is on track to reach its year-end inflation target of 36%. Markets, meanwhile, believe that the target will be achieved with a “three-month lag,” he said.
On the other hand, households’ expectations are more elevated and are “a lot less convinced” on policy action, according to Karahan. He said once headline inflation slows as of the summer months, that will support more savings in Turkish liras, according to Bloomberg.
Inflation target within reach, more tightening may be necessary
Stating that monthly inflation decreased throughout December and increased in the last few months due to minimum wage increases, Karahan said, “In general, we are on track to reach the inflation target that we have set as 36 percent for this year, 14 percent for next year and 9 percent for 2026. “We want to return to single digits,” he said.
Stating that Turkey wants to return to the 5 percent inflation target, Karahan added that CBRT tightened a lot and domestic demand is moderating. Yet, MPC members are monitoring the incoming data to evaluate whether the CBRT’s current stance is appropriate.
Other highlights from Karahan’s speech
Swaps with local banks caused a liquidity problem and made it more difficult to maintain a tight policy stance
Going forward, reliance on swaps to build reserves will reduce
“Now that the hiking cycle is over, we want to be on top of liquidity management” and banks don’t want to rely on swaps
De-dollarization is one of the main priorities for the central bank
Net reserves, excluding swaps, are in negative territory and the bank wants to improve that in the medium-term.
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