Türkiye's central bank revised its year-end inflation forecast by three percentage points on Friday and its governor stressed the monetary authority is "not on autopilot mode" after two consecutive interest rate cuts, saying that decisions are made based on data.
The forecast revision to 24% from 21% previously and Central Bank of the Republic of Türkiye (CBRT) Governor Fatih Karahan's hawkish message came as both inflation and interest rates head lower and authorities predict the coming end of years of price turmoil.
Presenting the bank's first quarterly inflation report of the year, Karahan stressed the upgrade of the forecast did not signal any easing in Türkiye's monetary policy stance.
"This is not an easing cycle, but an interest rate reduction cycle. We are continuing while maintaining tightness ... We are not on autopilot in any way ... We are data-driven and go from meeting to meeting," the governor told a press conference in Istanbul.
Karahan mentioned that the extent or number of interest rate cuts would depend on the inflation outlook. "If there is a deterioration in the inflation outlook, we will consider all options," said Karahan.
"We can pause or change the size of policy rate moves," he noted. "Rate cuts are made in line with data."
The revision for 2025 was driven by factors that are relatively "beyond the control of monetary policy," said the governor. "Thus, it does not signal any easing of the monetary policy stance,"
Among the leading factors for this year's revision were the increase in the weight of the services group in the CPI basket, along with food prices and a rise in state-administered prices, he explained.
The bank's inflation battle began in June 2023 when it launched a series of aggressive rate hikes totaling 4,150 basis points up to 50% in March 2024 in an abrupt shift to more conventional policymaking after years of low rates aimed at boosting growth.
After two months of rate cuts, the benchmark one-week repo rate now stands at 45% and is expected to fall to 30% by the end of the year.
The Turkish lira was slightly weaker on Friday at 35.9850 against the U.S. dollar, having closed at 35.8660 the previous day. Bonds and stocks were little changed.
Annual inflation, which peaked above 75% in May last year, eased to 42.12% in January, official data showed this week. Monthly inflation climbed more than expected to 5.03% due to a minimum wage hike and several new-year price revisions.
Karahan highlighted that the underlying trend of inflation rose in January, in line with the CBRT's forecast, as he noted a recent increase in patient contribution fees for health services, which he says is the first since 2017.
Under the new regulation, patient contribution fees for health services in public hospitals have increased by 233%, while fees for large city hospitals have surged by 543%.
"The high rate of this increase had a 0.6 percentage point impact on January inflation. Moreover, the effects of this regulation will spill over into February inflation," said Karahan.
The central bank left its forecast for the inflation rate at the end of 2026 unchanged at 12% and predicted an 8% rate by the end of 2027.
"We kept our 2026 forecast unchanged within a context where the probable secondary effects of the revision in our 2025 forecast through expectations will be offset by the tight monetary stance," said Karahan.
The governor reaffirmed the central bank's commitment to its disinflation strategy, highlighting measures such as maintaining tight financial conditions, encouraging moderation in domestic demand, and fostering the real appreciation of the Turkish lira.
"The decline in the underlying inflation will continue in 2025 as the stickiness in services inflation weakens and the improvement in inflation expectations become more pronounced," he said.
Karahan emphasized that the tight stance would continue until a permanent decline in inflation and price stability is achieved. "During the disinflation process, we will continue to do whatever is necessary to reduce inflation in line with our intermediate targets."
He pointed out that uncertainty regarding global trade policies has "significantly increased" and noted that market pricing in both developed and developing countries indicates slower interest rate cuts in 2025.
"I expect the CBRT to continue to cut interest rates by 250 basis points in March. Of course, this is if February inflation does not exceed expectations," said Yatırım Finansman chief economist Erol Gürcan, forecasting a month-over-month inflation reading of around 3%.
The size of the cut may decrease in the second half of the year, Gürcan said. Some economists believe that the reduction in the size of cuts could begin before the second half of the year.
Karahan also mentioned that demand conditions are supportive of the decline in inflation, stating, "As a result of our tight monetary policy, balanced domestic demand will continue ... The output gap will remain in the negative territory in the upcoming period, continuing to be an important component of the disinflation process."
He said an increase in the current account deficit is expected in the upcoming period, but noted that it "will be limited due to our tight monetary stance."
"We foresee that the current account deficit relative to GDP will remain below its historical average in 2025."
He also stated that the foreign exchange-protected lira deposit scheme would be terminated "prioritizing legal entities" within the year.
"When forming our medium-term forecasts, we assumed that we would maintain a tight monetary stance until a permanent decline in inflation and price stability is achieved. Additionally, we reflected the continued increase in coordination among economic policies in our forecasts."
Karahan emphasized that fiscal policy coordination would continue to increase, referring to the government's goal of reducing the budget deficit.
Highlighting the importance of policy coordination to reduce inflation from high levels to single digits, Karahan said that coordination has been "successfully implemented" so far.
"There are some rigidities due to the earthquake and retirement age reform. As a result, the budget balance has not been sufficiently supportive of disinflation. However, the medium-term program (MTP) predicts that the budget deficits will decrease relative to GDP starting this year," he added.
"We foresee a 1 percentage point reduction in public spending relative to GDP. We expect this to be achieved with necessary measures in place," he said.
While the sharp increase in the CBRT's foreign exchange reserves continues, Karahan stated that the recovery would continue at a slower pace for the rest of the year.
Noting that foreign exchange reserves have not yet reached "full adequacy," Karahan said, "Compared to similar developing countries, we are behind. As market conditions allow and as long as it does not conflict with our disinflation target, we will continue to accumulate reserves. Of course, this will be at a somewhat slower pace."
The governor noted that the main factor contributing to the approximately 30-ton increase in gold reserves over the past year was purchases of gold ore and that the rise in gold prices increased total reserves by approximately $20 billion.
