TCMB President Fatih Karahan stated, “We will maintain our tight monetary policy stance until a significant and sustainable decrease is achieved in the core trend of monthly inflation and until inflation expectations approach the targeted forecast range.”
The 92nd Ordinary General Assembly Meeting of the TCMB was held at the Bank’s Headquarters.
Karahan stated in his speech that 2023, the centennial of the Republic, was a year in which the Central Bank conducted its activities with the awareness that it would contribute the most to societal welfare by ensuring price stability and took determined steps in this direction.
Karahan reported that global economic activity remained weak last year, with gradually declining growth rates, especially in countries where Turkey exports, continuing to decline in 2023. He also noted, “Although global inflation has significantly declined compared to the previous year, it has continued to remain above the targets of central banks. In countries where inflation has remained above target during this period, monetary tightening has continued.”
Karahan emphasized that in Turkey, although economic activity was strong due to domestic demand in the first half of last year, it lost momentum in the second half, but remained resilient. He highlighted the services sector’s growth as the main driver of production.
Reminding that the current account deficit was $45.4 billion in 2023, Karahan continued his speech as follows:
“The highest negative contribution to the current account deficit came from the energy balance. Excluding gold and energy, the foreign trade balance continued to make a negative contribution to the current account balance, while the positive contribution of service items to the current account balance continued to increase. Annual consumer inflation was 64.8% in 2023. Inflation declined in the first half of the year due to base effects, horizontal movement in exchange rates, a decrease in foreign currency import prices, and the impact of energy subsidies. Thus, annual inflation was 38.2% in June. High increases observed in credit growth due to monetary conditions, wage adjustments, and transfers to households made demand-side effects more pronounced in the first half of the year.”
Karahan pointed out that imbalances in supply and demand occurred due to earthquakes in February last year, and the reconstruction activities increased pressure on public finances in the short and medium term, exacerbating inflationary pressures.
Referring to these developments, which negatively affected pricing behavior, Karahan stated that the decline in inflation in the first half of the year paved the way for its increase in the second half.
“In the third quarter of 2023, the cumulative effects of the ongoing strong trend in domestic demand, tax adjustments, exchange rate developments, wage increases, rigidity in service inflation, and sudden increases in oil prices affected inflation dynamics significantly. Moreover, the simultaneous occurrence of multiple shocks historically at high levels accelerated the transmission of these shocks to prices, leading to a significant increase in inflation in the third quarter,” he said.
Karahan reminded that inflation increased by 23.3 points in the third quarter of last year, reaching 61.5%, and concluded the year with annual consumer price inflation of 64.8% due to the improvement in the main trend in the fourth quarter.
“We will continue to use the one-week repo auction rate as the main policy rate”
Karahan emphasized that they started a strong monetary tightening process in June last year to establish disinflation as soon as possible, anchor inflation expectations, and control deteriorations in pricing behavior.
Karahan reminded that they increased the policy rate by a total of 34 basis points in the June-December period of last year, reaching 42.5% from 8.5%.
Karahan stated that they evaluated the continued stabilization in inflation expectations and pricing behavior in January this year and increased the policy rate to 45%, and made the following assessment:
“In February, however, despite considering the delayed effects of monetary tightening and other policy measures supporting monetary transmission, we kept it unchanged. However, the main trend of monthly inflation in February exceeded expectations, led by service inflation. Taking into account the risks to inflation and the deterioration in the inflation outlook, we increased the policy rate by 5 points to 50% in March. Additionally, we decided to make a change in the operational framework, setting the overnight borrowing and lending rates of the Central Bank at a margin of ‘+/- 300 basis points’ compared to the one-week repo auction rate. This change is a technical correction made considering the high level of interest rates. In other words, we will continue to use the one-week repo auction rate as the main policy rate.”
“We maintained our cautious stance against upward risks”
Karahan stated that despite the continuing weakness in the main trend of monthly inflation in March, monthly inflation was higher than expected, indicating that the course of consumption goods and gold imports contributed to the improvement in the current account balance, while other indicators for the recent period indicated continued resistance in domestic demand.
Karahan said that with the effect of the policy steps taken in March, financial conditions tightened significantly, and they closely monitored the effects of monetary tightening on loans and domestic demand, and continued, “In this context, while keeping the policy rate unchanged in our meeting in April, taking into account the delayed effects of monetary tightening, we would like to emphasize that we have maintained our cautious stance against upward risks to inflation.”
Karahan pointed out that the monetary tightening they have implemented since June last year has partly reflected the demand conditions and continued his speech as follows:
“In the second half of last year, there was a significant improvement in external financing conditions, an increase in reserves, an improvement in the current account, an increase in the share of Turkish lira deposits, and an increase in demand for Turkish lira assets. All these developments have contributed to the stability of the Turkish lira and the effectiveness of monetary policy. With the support of monetary tightening, we have observed a continuation of the improvement in inflation expectations for 12 and 24 months, which started as of September 2023, while year-end inflation expectations are still above the forecasts we shared in the inflation reports. We observe the effects of the determined steps we have taken in simplification in the form of increased functionality of the market mechanism and strengthening of the monetary transmission mechanism. During this process, while the share of Turkish lira deposits in the financial system increased, the share of exchange rate hedged and foreign currency deposits decreased, contributing to both financial stability and strengthening the monetary transmission mechanism.”
“We expect disinflation to be achieved in the second half of 2024”
Karahan emphasized that for the successful realization of the disinflation process, the banking system must fulfill its intermediary function with maximum efficiency and said, “In this context, while implementing simplification steps on the one hand, we take steps to support the monetary transmission mechanism in case of developments other than those foreseen in credit growth and deposit interest rates. We expect the ongoing slowdown in total loan growth since March to weaken the resilient trend in domestic demand. Thus, we evaluate that we will enter a healthy disinflation process with balanced domestic demand.”
Karahan stated that they closely monitor monthly price developments and said, “We will continue our tight monetary policy stance until a significant and sustainable decrease is achieved in the core trend of monthly inflation and until inflation expectations approach the targeted forecast range. In case of a significant and permanent deterioration in the inflation outlook, we will tighten the monetary policy stance. We anticipate that our determined stance in monetary policy will reduce the main trend of monthly inflation and achieve disinflation in the second half of 2024.”
“We strengthened the IT infrastructure in cash transactions”
Karahan said that they started a strong monetary tightening process from the second half of 2023 to establish disinflation as soon as possible, anchor inflation expectations, and control deteriorations in pricing behavior.
Karahan stated that effective communication of these policies and coordination with other stakeholders are of great importance, and said, “In this context, we have pursued a simple, transparent, and two-way communication policy to explain the policy decisions we have taken to ensure price stability, our main goal, to all stakeholders and to provide effective expectation management. In 2023, we took steps to use technological and financial infrastructure more intensively and effectively. We strengthened the IT infrastructure in cash transactions. With the technological investments we have made, we have increased our daily banknote processing capacity.”
Karahan stated that efforts continued for the establishment of systems required in information technologies and to ensure their security and continuity.
Reminding that they raised the FAST transaction amount limits in fund transfers, Karahan said that they shared the findings obtained within the scope of the first phase studies of the Digital Turkish Lira Project with a comprehensive evaluation report.
Karahan emphasized that the main goal and priority of the TCMB is to ensure price stability and concluded, “We will continue to determine monetary policy in a way that will provide the necessary monetary and financial conditions to achieve inflation, first to single digits and then to the target of 5% in the medium term, in line with this goal.”
source: aa.com.tr/ prepared by Melisa Beğiç