The Turkish central bank kept its year-end inflation forecast unchanged at 24%, its governor said Thursday while presenting the second inflation report this year, also signaling the readiness of the monetary authority to maintain a tight stance until a permanent decline in inflation is sustained and price stability is achieved.
"Same as the previous reporting period, we forecast inflation for end-2025 at 24%. We maintained our inflation forecast for the end of 2026 at 12%," Central Bank of the Republic of Türkiye (CBRT) Governor Fatih Karahan told the briefing in Istanbul.
He added that the bank targets for inflation to decrease to 8% in 2027 and stabilize at 5% in the medium term. The governor also noted that the bank maintained its forecast range for this year between 19% and 29%, citing the recent rise in uncertainties.
The annual inflation rate in Türkiye slowed down to 37.9% in April compared to around 75% in May last year, according to the official data.
Starting his speech, the governor recalled that the disinflation process has continued since June 2024, highlighting expectations for the trend to continue this year, despite several risks, including global uncertainties and a potential uptick in food prices.
"In response to the financial market developments in March and April, the CBRT proactively took the necessary measures. Going forward, we will maintain our decisive monetary policy stance and act to ensure the continuation of the disinflation process," Karahan said.
The central bank had started cutting interest rates last December after a long tightening cycle, and has again raised the key policy rate by 350 basis points, from 42.5% to 46% last month, in response to market developments following the detention of Istanbul Mayor Ekrem Imamoğlu. He was arrested in late March on corruption charges.
Touching upon global markets, Karahan said that "we are witnessing important changes globally," reminding of a wide range of tariffs announced by the U.S. on April 2.
"Despite the recent moderation, uncertainties surrounding global trade and economic policies remain elevated. While these uncertainties increase downside risks to global growth, potential inflationary effects vary across countries," he noted.
The governor also explained that due to the protectionist measures, growth expectations for all major economies have declined, while mentioning that this also impacts the external demand projections for Türkiye negatively.
"Changes in the eurozone growth have particular significance in this respect. For instance, the 2025 growth forecast for Germany, one of the most important trade partners of Türkiye, was revised from 0.7% in October to 0% in May," Karahan said.
He also mentioned that the rise in protectionism has the potential "to decelerate the fall in global inflation," while suggesting that, in addition to financial asset prices, commodity prices may also fluctuate depending on global trade policies.
Turkish authorities have earlier said that a fall in oil prices would be a positive development for Türkiye, as they have tested the value of $60 per barrel before slightly increasing again this week.
Regarding domestic developments and demand, Karahan said that the bank's tight monetary policy "has led to a notable balancing of demand composition in 2024."
"While the impact of domestic demand on growth has declined considerably, the positive impact of net exports stands out. Meanwhile, economic activity recovered in the last quarter of the year," he stated.
Moreover, he added that domestic demand, although losing momentum, was above projections in the first quarter. He said there was a loss of momentum in retail sales and that goods inflation remains relatively low.
"Following the tightening, consumption of goods has fallen below the trend. There is also a loss of momentum in retail sales. This outlook is more evident when gold is excluded ... When we consider the data on demand conditions as a whole, we see that the disinflationary impact of demand conditions declined in the first quarter," said Karahan.
"The average of the indicators based on alternative methods implies a negative level in the second half of 2024 and a near-neutral level in the first quarter of this year."
In addition, he also provided estimates for the current account deficit, indicating that the "balance recorded a significant improvement in line with the moderation in domestic demand."
"The ratio of the current account deficit to gross domestic product (GDP) dropped to 0.8% in the last quarter of 2024," the governor said.
He explained that for this year, downside risks to the current account deficit include energy and commodity prices, and on the upside risks side, the global demand stands out.
"Despite the weak global demand and the recent uncertainty regarding trade policies, exports remained strong with a mild increase. Meanwhile, imports increased due to the demand brought forward in response to the uncertainty," he said.
"We forecast that the current account deficit-to-GDP ratio in 2025 will be slightly higher than in 2024, but will remain below long-term averages," he added.
He also said that since the previous reporting period, "inflation has been below the midpoint of our forecast range."
"Following a rise in January, the underlying inflation slowed significantly in the February-March period. Then, we witnessed a partial increase in April due to the developments in financial markets. Here, I could add that the leading data for May point to a lower course in the underlying inflation compared to April," he maintained.
He also said they observed "a slowdown" in services inflation, although he said it was more gradual than in goods inflation. The governor cited that items with a strong tendency to backward indexation, such as education and rent, pushed this group up.
Moreover, while underscoring a fall in crude prices compared to the previous inflation report, Karahan warned of upside risks to food prices due to the recent frost, which impacted vast swathes of Türkiye.
"Last month's agricultural frost across the country increased the upside risks to unprocessed food prices, particularly fruit prices, for the upcoming period," he said.
The share of the 16 most affected products in the consumer basket is around 1.5%, he informed.
"While registered and leading data suggest that there has not yet been a negative reflection in food prices, we consider that this development may exacerbate pressures on food inflation in the upcoming period," he added.
Additionally, he recalled steps and measures taken by the CBRT following volatility in March, pledging to "continue to use all monetary policy instruments proactively and decisively to maintain the effective functioning of markets."
Suggesting that they revised down their assumptions for crude oil and import prices for 2025 and 2026 and revised upward the food prices assumption for this year, Karahan concluded by sharing inflation expectations.
He expressed belief that inflation at year-end would come in between the bank's range of 19% to 29%.
