Central Bank starts the year by raising its end-2025 inflation forecast

Central Bank of the Republic of Turkey (CBRT) Governor Fatih Karahan made important updates in the first Inflation Report presentation of the year. The year-end inflation forecast for 2025 was raised from 21% to 24%, while the forecast for 2026 was kept unchanged at 12%. Moreover, the inflation forecast for 2027, which was announced for the first time, was set at 8%. In his presentation, Karahan emphasized that the disinflation process continues and macroeconomic indicators are in line with this process. He stated that domestic demand has reached a supportive level to reduce inflation and the underlying trend of inflation is on a downward trend. He stated that the tight monetary policy stance will continue and the disinflation process will be supported. He added that uncertainties in global trade policies have increased and the expectation of a gradual recovery in global growth continues. He also pointed out that fluctuations in energy prices continued. He stated that central banks tend to reduce monetary tightness depending on inflation trends, while pricing in the markets indicates that interest rate cuts will slow down in 2025. Karahan stated that they expect an increase in the current account deficit, but this increase will be limited by the tight monetary policy. He predicted that inflation will slow down again in the second quarter and stated that a gradual slowdown is seen in the underlying trend. He also emphasized that rental inflation, although high, tends to slow down. Stating that the tight monetary policy stance has improved expectations, Karahan said that deposit rates continue to support the transition to TL and savings. He stated that the return to FX remained limited in the FX Protected Deposit (FXPD) practice and stated that this practice will be terminated within the year with priority given to legal entities. Explaining that the inflation expectation for 2025 has been set at 24%, for 2026 at 12% and for 2027 at 8%, Karahan shared his predictions that inflation will stabilize in the medium term by approaching the 5% target. He emphasized that the revisions stemmed from factors outside monetary policy, such as food prices and administered prices, and that this did not signal any easing in the monetary policy stance. Governor Karahan's answers to the questions during the Q&A session are below: ,,Consumer demand is usually limited. We use macroprudential limits for different purposes. However, the main tool for determining the tightness is the policy rate. This has been the case until today. We can make these adjustments in case of sudden capital movements or fragility in expectations. I have three main objectives: a reduction in the CCR and an increase in TL deposits, limiting credit growth in line with disinflation, and finally limiting excess liquidity. Haluk Bürümcekçi said, "In the revision, the administered effect appears to be 1.7 points. Is this mostly due to health expenditures? In the forecast, the midpoint in December for January looks like 5. The realization seems to be in line, but there is also a revision. Is it better than the forecast? In the last MPC text, you said that you expect January inflation to be in line with our forecast, is it due to this?" The high revision does not signal any extra easing in monetary policy. 0.8 points comes from the revision of inflation weights and 1.7 points comes from the managed side as you mentioned. January inflation did not come in outside our expectations. The change in the health field was effective. The index rises in January and February and July and August for various reasons. There is a mechanical increase in behavior and expectations do not deteriorate. We do not see a deterioration in the main trend. Will there be a macroprudential measure in consumer loans? Consumer demand is usually limited. We use macroprudential limits for different purposes. However, the main tool for determining the tightness is the policy rate. This has been the case until today. We can make these adjustments in case of sudden capital movements or fragility in expectations. I have three main objectives: a reduction in the CCR and an increase in TL deposits, limiting credit growth in line with disinflation, and finally limiting excess liquidity. Haluk Bürümcekçi said, "In the revision, the administered effect appears to be 1.7 points. Is this mostly due to health expenditures? In the forecast, the midpoint in December for January looks like 5. The realization seems to be in line, but there is also a revision. Is it better than the forecast? In the last MPC text, you said that you expect January inflation to be in line with our forecast, is it due to this?" The high revision does not signal any extra easing in monetary policy. 0.8 points comes from the revision of inflation weights and 1.7 points comes from the managed side as you mentioned. January inflation did not come in outside our expectations. The change in the health field was effective. The index rises in January and February and July and August for various reasons. There is a mechanical increase in behavior and expectations do not deteriorate. We do not see a deterioration in the main trend. Is it possible to pass on the interest rate cut in future meetings? In the decisions, we observe changes in demand balancing and pricing behavior. We were looking at the participation of the real sector and households. There was a decline in expectations. There is room for discounts. We are not on autopilot. We are data-driven. There is a certain room, but it is important to be cautious. We will act in a way that will not spoil the outlook. We evaluate all kinds of options in terms of the size of the steps or stopping. You stated that you evaluate according to monthly inflation. Now the emphasis has shifted to the underlying trend. Why the change in communication?" We removed the monthly emphasis. Why did we make such a change in the text. In January and February, July and August, there are changes in areas that are outside the scope of monetary policy. There are technical issues in seasonal adjustment methods. When we make year-end forecasts, we know that the B and C indices will be high. The market may give a deteriorated outlook. Our communication can affect it. We emphasized the general trend, not specific monthly trends. A decline in the monthly trend is still considered important. It is not intended to create expectations. The policy rate cut was reflected on deposits and loans above expectations. Was there a disguised interest rate cut with the last withholding tax increase? I meant to say that it was in line with expectations. Some people interpreted it as a disguised interest rate cut. It is not an element that changes the funding cost of banking. It is not tightening or loosening. It affects deposit pricing. We have seen a serious change in dollarization. There are also macroprudential regulations on this issue. Banks are moving towards switching to TL. I do not think the withholding tax increase will trigger a return to dollarization. Cevdet Akçay, Deputy Governor of the Central Bank, said, "We know that the real appreciation of the TL strengthens the downward pressure on inflation, albeit asymmetrically, but the pass-through is still high. We convey that real appreciation of the TL is essential. It is also important that disinflation happens quickly so that pressure does not build up." Do you expect a slight deterioration in household behavior? Market participants look at the consistency of the incoming data. The real sector looks at the realized inflation in the two previous reports. Households are also sensitive to realized inflation but sensitive to highly visible prices. Inflation is falling. It is falling in all items. Faster in some and slower in others. As the decline continues, it will be reflected in expectations. Especially the increases in rents affect many items. In the 3-year disinflation process, will the determination of rent increases according to the 12-month averages of the tufe harm the process? Inertia in rent is high. It is also high due to stock calculation. Renewed contracts are low compared to headline inflation. It will fall in the next period. The imbalance in the supply-demand balance will continue, but the outlook is positive. You said that the real sector in expectations is sensitive to realized inflation. But what do you attribute the difference in expectations and actual inflation to? The decline in the headline figure of inflation is reflected with a lag, it is normal. What is important here is that the decline in inflation continues and the monetary policy stance is maintained. How do you assess the possible effects of Trump in the US? The Fed has also suspended its cuts. Will it be enough to change the targets? What we know for sure is that uncertainties are high. The second thing we know is that the dollar will gain strength. If these protectionist policies are implemented, interest rates will remain high due to the inflationary effect. What will happen also depends on the details. It is not known what will be implemented and to what extent, and how other countries will respond. We analyzed the first Trump era. When we looked at that period, we saw that TR gained market with the taxes imposed by the US on China. It is important what will be implemented and how. Capital flows to developing countries may be affected. For us, the main problem in terms of inflation outlook is still domestic. Domestic rigidity is still the more prominent risk for us. We assess that the prudent stance has become somewhat more important. There is an increase in central bank gold purchases. Will the commoditization trend in reserves continue and what will be the impact on the current account balance? We have come a long way in our reserve policy as long as market conditions allow and as long as it does not contradict inflation targets. We cannot say that we have fully reached reserve adequacy. In January last year, we had 726 tons of gold reserves and now we have 765 tons. Prices have also affected. It will be slower than last year. It is difficult to project rigidity in service prices. Could there be a reduction in your projection? Could there be more appreciation in the real exchange rate? When we look at the data, we see that the rigidity is rent driven. It is positive but it will not fall fast. This rigidity will continue. Education prices have also come to the fore recently. What they have in common is an accumulated situation due to price controls in the past. The reflection has been going on for 1 year. It will continue for a while and then fizzle out. Some of it comes from the past, not all of it is supply and demand. Pricing is based on past inflation. It is seen that the rigidity will start to break down as expected inflation increases. In January, there is a more positive outlook except for rent. Record housing and automotive sales. We see a 45-degree increase in retail sales. Which domestic demand is being monitored here? Doesn't the tightness of the current monetary policy affect this? Cevdet Hodja, the reserve has strengthened, recovery has been seen, the current account deficit has fallen. Everything looks good, but we are still continuing with measures. Will the exchange rate measures be removed? I answered about the exchange rate. It is necessary to evaluate price and quantity together. Housing prices declined according to the basket. The course of service demand seems clearer. This is the important side for us. On the goods side, it is important to look at many indicators excluding the gold effect. Jewelry increased with the gold quota. It is necessary to look at consumption goods imports in this way. When we evaluate it like this, there was a much more horizontal outlook.