The Turkish central bank pledged to "do everything" it can to bring inflation down in line with its targets, despite a recent slowdown in disinflation, its governor said on Wednesday.
In a live interview broadcast by the bank, Central Bank of the Republic of Türkiye (CBRT) Governor Fatih Karahan likened inflation to a virus, but said the correct policy steps are being taken and that they have "achieved a lot of results so far."
"There has been a recent slowdown in disinflation, but even so, we will do our best to reduce inflation in line with our targets by recalibrating the monetary policy tightness and taking the necessary measures," he said.
"Demand conditions are currently consistent with disinflation," he added.
Inflation eased a bit more than expected in October to 32.87% annually and to 2.55% monthly, after remaining more elevated than expected in September.
The central bank responded to the price pressure by slowing its easing cycle with a 100-point interest-rate cut last month to 39.5%.
Disinflation is a "long-term process," but preliminary indicators suggest it continues in a healthy way in November, Karahan also said. The official data is due to be released next week.
He also recalled that after the September reading, a pessimistic view resurfaced, suggesting, however, that it is needed to look at the details and items to know whether this would remain permanent. He cited as the first factor the impact of food prices on inflation, which he tied to frost and drought earlier in the year, but also pointed to education prices as the school year starts in September.
"Inflation is essentially like a virus. When it stays in the body for a long time, it becomes difficult to eliminate," he further said.
"But we are applying the right prescription. We have achieved positive results so far. We have no doubt about our ultimate goal. The timing of the prescription's effect varies from body to body," he added.
In his opening remarks, while answering the questions from journalists, he emphasized that they have decided to take communication a step further. Karahan said that this year they first toured various cities to meet with industry and chambers of commerce there, tradespeople and civil society organizations.
He also recalled the steps taken by the bank to improve its financial position, underscoring the importance of the exit from the FX-protected scheme, or the so-called KKM.
Karahan said that, as the central bank, they have three priority objectives in terms of macro-financial stability: to improve the reserve position, to reduce the balance of KKM and to establish disinflation and bring inflation down to single digits.
Impact of policy seen
Of this, he highlighted the third one and emphasized that the CBRT's top priorities are disinflation and price stability. "Our goal is to reduce inflation to single-digit levels and then stabilize inflation at 5%. The policy impact to date is very clear; first, we have limited inflation to 75%," he suggested.
Furthermore, he noted that the impact of the tight monetary policy was seen first in the reserves, citing that a very large share of this increase was domestically sourced.
Noting that with confidence in the Turkish lira being reestablished, citizens converted their foreign exchange holdings, Karahan said: "We accumulated these converted FX funds in our central bank reserves, and thus we improved our reserve position.”
Speaking about the interest rate transmission mechanism, Karahan stated that the widely accepted market perception that "if the policy rate falls, market interest rates will fall" is not always correct. He added, "If expectations deteriorate, interest rates may not fall, and may even rise."
He also underscored the importance of inflation expectations as one of the determinants they look at when considering monetary policy. In this, they look at three groups: market professionals and economists, the real sector and companies and households' expectations.
As the determinant of demand, households are a very important group, Karahan said. Furthermore, he also touched upon the issue of "perceived inflation," which is frequently discussed in public.
"When we looked at it, we saw that market participants' expectations had been declining for quite some time. We've seen some reversal in the last few months, particularly with the slightly negative September data. However, real sector and household expectations remain quite positive and continue to decline," he noted.
"However, household expectations remain quite high. Rather than measuring expectations, household expectations report more on actual inflation. They even report on perceived inflation. This is the case globally, and not just in our country," he added.
Concluding his remarks, he emphasized the bank's single and top priority goal of price stability.