Central Bank of the Republic of Türkiye (CBRT) Governor Şahap Kavcıoğlu announced on Thursday the bank kept the inflation forecasts unchanged at 22.3% for the end of 2023 and 8.8% for the end of 2024.
In the second inflation report briefing of the year, Kavcıoğlu said cost pressures on inflation were largely removed.
Inflation decreased to 43.7% in April, marking a significant decline of 42 points from its peak of 85.5% in October, Kavcıoğlu said.
He noted that the exchange rate stability as a result of effective policies, improved expectations and a slowdown in global commodity prices are playing a decisive role in the disinflation process.
The central bank governor said that despite the inflation continuing to decline, it remained above the forecast range outlined in the previous inflation report. The bank attributed this development to increases in unprocessed food prices that were higher than projected.
Kavcıoğlu clarified that the bank’s inflation forecasts were interim targets as stated in the "Monetary Policy and Liraization Strategy for 2023" and that the bank is committed to utilizing all the tools of its Liraization Strategy to support an inflation path consistent with its forecasts.
He said the CBRT has acknowledged that the Turkish lira-denominated import prices, along with the stable course of the Turkish lira, had a lowering effect on its forecasts by 2.3 points. However, the impact of realized food prices pushed the bank's estimates up by 1.5 points. Additionally, the stronger course of domestic demand than anticipated contributed to the forecasts by 0.2 points.
Kavcıoğlu noted that the CBRT had factored in the downward trend in commodity prices while developing their forecasts. He added that import prices were expected to decrease in 2023 and that the bank observed faster and more balanced global growth compared to the previous reporting period. Additionally, supply constraints and supply conditions had improved more strongly than anticipated.
Pointing out that the global growth figures were realized above the estimates and the recession concerns decreased, Kavcıoğlu stated that they updated their global growth forecasts to a limited extent compared to the previous reporting period.
Kavcıoğlu stated that they will resolutely follow the anti-inflation strategy in which price stability-oriented holistic policies will be implemented by all stakeholders in the most effective way, Kavcıoğlu said, “We believe that within our current policy framework, credit conditions compatible with the decline in inflation and stable exchange rates will provide a stronger improvement in the underlying trend of inflation than our previous report forecasts.
Emphasizing that despite the periodic crises in the global economy, inflation and interest rates remained low for decades, public deficits and central bank balance sheets expanded rapidly, Kavcıoğlu said that the supply shocks as a result of the pandemic and the Russia-Ukraine war came to an end with the inflationary effects.
“While the initial effects of supply shocks have faded, we are in a transition period in which core inflation indicators are high, financial conditions tighten, borrowing costs increase and uncertainties on the financial system remain high. In this conjuncture, our monetary policy framework, the Liraization Strategy, which we have created with complementary tools and a sustainability approach, increases the ability and resilience of the Turkish economy to realize its potential. In the past two years, while the effects of the pandemic have not yet completely disappeared, the solid structure provided by the policy framework we have implemented in the face of the multi-faceted negative shocks caused by the war in our close region and high global inflation has enabled our economy to continue to strengthen successfully,” Kavcıoğlu emphasized.
The CBRT governor stated that the Turkish economy is expected to outperform expectations in 2023. Despite the challenging geopolitical and global financial conditions, the national income is predicted to increase by 5.6%, machinery-equipment investments by 11.7%, exports by 12.9% and employment by 6%. Kavcıoğlu also highlighted that they had shown resilience by increasing employment by 8%.
Kavcıoğlu emphasized that the Liraization Strategy, which was designed to achieve sustainable and permanent price stability, would continue to be implemented with determination. The bank will analyze the economy's balance in detail to determine policy rates that will facilitate the development of production capacity, he said. Additionally, the bank will ensure that its targeted credit policy and liquidity instruments function effectively to enable monetary transfers.
The bank intends to develop a framework that will promote investment, employment, production and exports while minimizing the demand-side effects of financial resources that may hinder these objectives, Kavcıoğlu said, and that they will create financial conditions that will increase the supply capacity and bring the current account balance into a structure that is compatible with permanent price stability.
Kavcıoğlu also pointed out that the bank had significantly increased the resilience of its reserves through reserve management. The bank will maintain its strong reserve structure, which also serves as an important anchor in reducing volatility in the foreign exchange markets, he said.
