Türkiye's central bank on Friday said tight financial conditions were playing a supportive role in balancing domestic demand and advancing the disinflation process, adding that the moderate loan growth was also consistent with the slowdown trend in price growth.
Inflation eased a bit more than expected in October to 32.87% annually and to 2.55% monthly, after having remained more elevated than expected in the previous two months, which prompted the Central Bank of the Republic of Türkiye to slow its easing cycle.
Despite heightened global uncertainty and geopolitical risks, the disinflation process improved Türkiye's sovereign risk premium, the bank said in its biannual Financial Stability Report.
"Since the previous issue of the report, tight financial conditions have continued to support the balancing of domestic demand and the disinflation process," CBRT Governor Fatih Karahan said in the foreword of the report.
"As a result of our tight monetary policy stance, loan growth has been moderate, consistent with the disinflation process," Karahan noted.
The central bank responded to the price pressures by slowing its easing cycle with a 100-point interest-rate cut last month to 39.5%.
At the previous meeting in September, it had already tapped the brakes with a 250-basis-point reduction, having lowered the one-week repo rate by 300 basis points in July.
In April, it had reversed the cycle that had begun in December by hiking the benchmark rate to 46% amid volatility over the arrest in March of former Istanbul Mayor Ekrem Imamoğlu. He was jailed pending trial over graft charges.
Karahan said loan and deposit pricing have been in line with the changes in the policy rate and expectations. "The steps we have taken within the macroprudential framework, which we use as a complementary tool for the policy rate, have slowed foreign currency loan growth and strengthened the monetary policy transmission," he noted.
Meanwhile, the tight financial conditions impacted asset quality indicators to some extent, with retail loans diverging negatively from corporate loans, according to Karahan.
Amid restored stability following the fluctuations in financial markets in the first quarter, Karahan said demand for Turkish lira assets increased, the share of lira deposits remained stable at high levels and the CBRT reserves continued to rise.
The report said the share of lira in the composition of commercial loan growth increased, driven by the slowdown in foreign currency loan growth.
Karahan also recalled that the account openings and renewals for foreign exchange-protected deposits were terminated, and said the balance of these accounts has receded to relatively low levels.
Despite elevated global uncertainty and geopolitical challenges, Karahan said, the sovereign risk premium improved further, contributing to the favorable outlook in external financing conditions for banks and the corporate sector.
The report said the recovery trend in banks' profitability became more pronounced in the third quarter due to policy rate cuts.
"Alongside the banks' improved profitability outlook, strong liquidity and capital buffers have also contributed to macro-financial stability," Karahan added.
According to the report, the corporate sector's domestic foreign exchange loan growth slowed down and access to external financing remains strong.
