Central Bank of Turkey raises year-end inflation forecast

Central Bank of Turkey (CBRT) Governor Fatih Karahan presented the year’s final inflation report, announcing an increase in the year-end inflation forecast from 38% to 44%. The food inflation forecast was also revised upward, from 35.5% to 41.8%. The CBRT expects inflation to fall to 12% by 2026. Karahan noted, “Although the improvement in inflation trends is slower than anticipated, it is progressing.”

Key Points from Karahan’s Statement

In the fourth “Inflation Report” briefing of the year, held at the CBRT’s headquarters, Karahan highlighted several critical aspects of Turkey’s current economic outlook and future expectations:

1. Global Demand and Import Prices:
   
   Karahan emphasized that CBRT’s assumptions for external demand remain unchanged. However, the bank has revised down its crude oil price assumptions for 2024 and 2025 based on recent trends, while adjusting upward food price expectations due to rising unprocessed food inflation.
   
2. Commitment to Tight Monetary Policy:
   Karahan reiterated that the CBRT would continue its tight monetary policy stance until there is clear, sustained improvement in inflation. This tight stance and policy coordination across economic measures are aimed at achieving medium-term inflation targets. He stated, “We are not considering any shift in monetary policy direction.”
   
3. Updated Inflation Forecasts:

• The CBRT raised the year-end inflation forecast for 2024 to 44%, up from the previously projected 38%.
• The 2025 inflation estimate was also raised to 21%.
• Inflation is projected to decline to 12% by 2026, reflecting expectations of improved price stability.

1. Factors Behind the Revisions:
   
   Karahan explained the key drivers behind the upward revision in inflation forecasts:

• The combined effect of factors like Turkish lira import prices and domestic demand conditions added 0.5 points to the 2024 forecast.
• The slower-than-expected improvement in inflation expectations, initial conditions, and core inflation trends contributed an additional 3.9 points to the year-end 2024 estimate.
• For the 2025 projection, factors like food prices, Turkish lira-denominated import prices, and controlled pricing assumptions led to a 3.3-point adjustment.
• The 2025 estimate was further raised by 3.5 points due to inflation inertia and core trends.
• Lastly, updates to the output gap path contributed an additional 0.2 points to the 2025 projection.

1. Focus on Key Economic Conditions:
   
   Karahan outlined two main conditions guiding the CBRT’s approach:

• Monthly Core Inflation Trend: A steady, sustained decline in core inflation.
• Alignment of Inflation Expectations: Ensuring that inflation expectations approach the CBRT’s target range. The bank closely monitors broad-based indicators of inflation expectations to assess these trends.

1. Effect on Rent Inflation:
   Karahan noted that the decline in reference rates used in rental agreements points to a slowdown in monthly rent inflation in the last quarter.
   
2. Interest Rates on Deposits and Savings:
   The current monetary policy stance and macro-prudential measures aim to keep deposit interest rates at levels that will encourage a shift to the Turkish lira and promote savings.
   
3. Revision Does Not Indicate Policy Shift:
   Karahan clarified that the upward revisions do not imply any change in the monetary policy stance. He emphasized, “Our responsibility is to permanently reduce inflation and ensure price stability.”
   

Comparison with Previous Report

In the previous (third) Inflation Report, the CBRT had forecast that inflation would decline to 38% by the end of 2024, with 2025 and 2026 forecasts maintained at 14% and 9%, respectively.