The governor of the Turkish central bank pledged Thursday to do "whatever it takes" to meet a year-end inflation target of 24%, saying that the bank will not allow demand conditions to impair the disinflation path.
"We will do whatever it takes to achieve our year-end inflation target of 24%," Central Bank of the Republic of Türkiye (CBRT) Governor Fatih Karahan told Anadolu Agency (AA) in an exclusive interview during a New York visit.
As part of his engagements in the U.S., Karahan addressed current economic issues during his visit to AA's New York office. He emphasized that the decline in inflation is primarily driven by a decrease in the underlying trend, supported by tight monetary policy, rather than base effects.
Karahan highlighted that this improvement in the underlying trend will continue to be a key factor throughout the rest of the year, reaffirming the central bank’s commitment to its inflation target.
Stressing the importance of maintaining a tight monetary policy stance, the governor underscored the necessity of keeping demand at disinflationary levels to ensure further progress in reducing inflation.
"We will ensure that demand conditions do not impair the disinflation process," he said, also noting that the conversion to Turkish lira deposits has outpaced conversions to foreign currency deposits.
Türkiye's annual inflation eased to a lower-than-expected 39.05% in February, down from a peak above 75% last May, the official data showed last week. Monthly inflation cooled to 2.27% last month, also less than expected.
Looking ahead, Karahan stated that the central bank’s priority will be setting the policy rate at a level that ensures the tightness required by the projected disinflation path. CBRT lowered rates by 250 basis points to 42.5% last Thursday, in the third consecutive cut since December.
Apart from the fight against inflation and monetary policy, he addressed a range of topics in the interview, including FX-protected deposits, the conversion to Turkish lira, and foreign currency loans.
Answering the question of how the inflation data should be read, the governor recalled that annual inflation has been on a declining path since its peak in May 2024, evaluating in detail the underlying trend and inflation among subgroups.
"Annual inflation has been on a decline since its peak in May 2024. A significant portion of the decline in the early months of the disinflation process was due to the base effect stemming from developments in the summer of 2023. During this period, we emphasized monthly price developments to better guide expectations for the policy rate," Karahan said.
Suggesting they were tracking the trend of seasonally adjusted underlying inflation indicators over the previous few months, he said that currently, they evaluate the fall in inflation to be driven by the decline in the underlying trend with the support of tight monetary policy, rather than by base effects.
"The improvement in the underlying trend will remain influential throughout the rest of the year," he added.
Also noting that in some cases seasonal adjustment methods "fail to capture the changes in seasonality patterns" that emerged after the pandemic, the governor conveyed the belief that "it would be more accurate to compare underlying trend indicators with those observed in the same month of the previous year."
He also pointed out that, when examining the underlying trend indicators for February, it is seen that the seasonally adjusted B index fell in 2025 to 2.8%, down from 4.3% in 2024, while the C index dropped to 2.4%, from 3.7% in 2024.
Karahan also stressed the need to look at inflation by sub-items to better understand inflation dynamics.
"In terms of annual inflation, we observe that goods inflation remains low, while services inflation, despite some rigidities beginning to dissipate, remains high," he said. Here, he said, rent and education items, which have time-dependent pricing and backward indexation, stand out.
"Meanwhile, within the services group, we see a significant improvement in items more sensitive to monetary policy. For example, inflation in the restaurant and hotel items fell from 95% to 46%. This indicates that monetary tightening has been effective in reducing inflation in these kinds of services," Karahan said.
"We will do whatever it takes to achieve our year-end inflation target of 24%. We will maintain our tight monetary policy stance and continue to bring inflation down in line with our year-end targets," he added.
Evaluating the demand conditions amid recent data on national income figures that revealed it stayed resilient in the last quarter of the past year, Karahan said that before the release of the data for Q4, they were monitoring data such as card spending, credit growth and retail sales.
"In the fourth quarter, these data pointed to a disinflationary demand level, despite some resilience. The corresponding growth data released in February showed that demand was stronger than we had forecasted. Accordingly, we emphasized this in the latest MPC decision press release," he said.
"It is crucial for demand to remain at disinflationary levels for inflation to continue declining," he added.
He also evaluated the data available for the first quarter so far, indicating that retail sales remained strong in January, while vehicle trade and wholesale trade volume decelerated. He also said that credit growth has been "more modest" compared to the final quarter.
"Meanwhile, data on credit card spending point to a weaker course in January and February," he said.
"Therefore, the available demand indicators for the first quarter, albeit with some uncertainty, imply that consumer spending has posted a milder course following the rise in the previous quarter. We will continue to evaluate this outlook as more demand indicators for the first quarter become available. We will ensure that demand conditions do not impair the disinflation process."
Also, answering the question on the Turkish lira appreciation and the current account deficit outlook for 2025, Karagab said the developments in the current account balance have indicated that the current account deficit-to-GDP ratio decreased to 0.8% at the end of 2024, down from the pre-tightening level of 5%.
"The average ratio of current account deficit-to-GDP in the last two decades has been 3.7%, so 0.8% is significantly low compared to historical averages. Recent data suggest a slight increase in the current account deficit in 2025, though," he said.
Looking at the factors that could affect the balance this year, the governor suggested that export-led downside risks stand out due to the uncertainty surrounding global trade.
"We expect the current account deficit-to-GDP ratio in 2025 to be higher than in 2024, yet remain significantly below long-term averages," he noted.
"As for real appreciation, our current monetary policy is not designed with a focus on the real appreciation of the Turkish lira. We do not have any targets for exchange rate levels and changes. However, our decisive monetary policy stance has led to an increased interest in the Turkish lira. As a natural consequence of this interest, we are experiencing both an increase in our reserves and a real appreciation," he explained.
He also cited recent steps to phase out FX-protected deposit accounts, mentioning the ongoing interest in the lira.
"In December, we introduced changes to reduce returns on FX-protected deposit accounts. In January, we terminated the long-term accounts and finally, in February, we discontinued the opening and renewal of FX-protected accounts for legal entities. Despite these developments, we observe an ongoing interest in the Turkish lira," he said.
"I would like to reiterate that, in the upcoming period, our priority will be to determine the policy rate in a way to ensure the tightness required by the projected disinflation path. We will maintain our tight monetary policy stance until price stability is achieved via a sustained decline in inflation. Our decisive monetary policy stance will support the interest in the Turkish lira," he added.
