Introduction to Türkiye’s Economic Outlook
Türkiye’s disinflation process is on track, with both short-term indicators and the broader economic outlook pointing to continued moderation in price growth. Central Bank of the Republic of Türkiye (CBRT) Governor Fatih Karahan recently reaffirmed the central bank’s commitment to maintaining a tight monetary policy until lasting price stability is achieved.
Current Economic Trends
Speaking at the High Advisory Council meeting of the Turkish Industry and Business Association (TUSIAD) in Ankara, Karahan stated that the progress made toward the objective of price stability is meaningful. The central bank policymakers decided to lower the policy rate by 150 basis points to 38%, marking a total of 800 basis points since the easing cycle began in July. This decision followed November’s better-than-expected inflation figures, which came in at 0.87% on a monthly basis, bringing the headline inflation down to 31.07%.
Factors Contributing to Disinflation
Karahan outlined three driving factors contributing to the decline in headline inflation, which fell from 64% in late 2023. These factors include rebalancing in domestic demand, normalization in pricing behavior, and improved inflation expectations. By category, core goods inflation fell below 19%, while food prices dropped to 27% despite persistent volatility. Services inflation, although still elevated at 44%, declined from its May 2024 peak.
Easing Cost-Side Pressures
Cost-side pressures also showed signs of easing, with producer price inflation dropping by 30 percentage points since May 2024, reaching 27% in November. In the services sector, producer inflation fell from 85% in May to 35%, marking a 50-point decline. Karahan emphasized that this downward trend in input costs was beginning to ease inflationary pressures more broadly.
Long-Term Credit Rates and Expectations
While short-term market rates remain closely tied to the central bank’s benchmark policy rate, Karahan stressed that long-term lending rates are more influenced by inflation expectations and uncertainty. He explained that institutions issuing long-term credit price risk based on future inflation rather than the central policy rate alone, so shifts in the policy rate may not immediately translate to market borrowing costs.
Future Policy Decisions
Karahan reaffirmed the bank’s data-driven and cautious approach to future rate decisions, stating that each move would depend on the evolving inflation outlook. He noted that the policy stance would be tightened further if there is a "clear deviation" from interim inflation targets. The central bank’s primary goal is to achieve price stability, which is a prerequisite for sustainable growth and shared prosperity.
Conclusion
In conclusion, Türkiye’s economic outlook appears to be improving, with the disinflation process on track and cost-side pressures easing. The central bank remains committed to maintaining a tight monetary policy until lasting price stability is achieved. As inflation continues to decline and confidence in price stability strengthens, credit maturities are likely to lengthen over time, supporting sustainable growth and shared prosperity. The central bank’s cautious approach to future rate decisions will be crucial in navigating the evolving inflation outlook and achieving its primary goal of price stability.
