Fatih Karahan: Recent economic and financial developments in
Turkey
Speech by Ms Fatih Karahan, Governor of the Central Bank of the Republic of Turkey,
at the 92nd Ordinary Meeting of the General Assembly, Ankara, 30 April 2024.
* * *
Esteemed Shareholders, Distinguished Guests,
In 2023, we proudly celebrated the 100th anniversary of our Republic. 2023 was also a
year in which the Central Bank of the Republic of Türkiye (CBRT) carried out its
activities with the awareness that the main contribution it can make to social welfare is
to achieve price stability and took decisive steps accordingly.
Before moving on to the agenda items to be discussed at the General Assembly, I
would like to share with you our assessments of macroeconomic developments since
2023 and provide some information on the monetary policy we have been
implementing. In the last part of my speech, I will briefly talk about the activities that we
carried out in 2023.
Distinguished Participants,
In 2023, global economic activity remained weak. The gradual decline in growth rates,
particularly in our export partners, continued in 2023. Meanwhile, global inflation
declined significantly from the high levels of the previous year yet remained above
central banks' targets. In this period, monetary tightening continued in countries with
inflation rates above targets.
In Türkiye, economic activity, which remained strong in the first half of 2023 on the back
of domestic demand, lost momentum in the second half of the year but remained
robust. On the production side, the services sector stood out as the main driver of
growth. The industrial sector made a negative contribution to growth in the first half of
the year due to earthquake-related effects and weak external demand but made a
positive contribution in the second half of the year. On the expenditures side, although
the contribution of final domestic demand remained high, it declined in the second half
of the year due to the slowdown in private consumption growth. Net exports made a
negative contribution to annual growth throughout the year due to the weak course of
global economic activity. However, in the second half of the year, imports decreased
due to the tight monetary policy while exports remained relatively strong.
The current account balance posted a deficit of USD 45.4 billion in 2023. The largest
negative contribution to the current account deficit came from the energy balance. The
foreign trade balance excluding gold and energy made a negative contribution to the
current account balance due to strong domestic demand, while the positive contribution
of services items to the current account balance continued to increase.
In 2023, annual consumer inflation stood at 64.8 percent. In the first half of the year,
inflation receded due to the base effects as well as the flat course of exchange rates,
the decrease in foreign currency-denominated import prices, and energy subsidies.
Thus, annual inflation stood at 38.2 percent in June. In the first half of the year,
demand-side effects on inflation became more pronounced due to the strong increase
in credit growth driven by monetary conditions, wage increases and transfers to
households.
The inflationary pressures increased due to supply-demand imbalances driven by the
earthquakes in February, and the short and medium-term repercussions of
reconstruction efforts on public finances. These developments facilitated a resurgence
in inflation in the second half of the year, which had declined in the first half of the year,
by adversely affecting pricing behavior.
In the third quarter of 2023, inflation dynamics were shaped by the cumulative effects of
the ongoing strong course of domestic demand, tax adjustments, exchange rate
developments, wage increases, the stickiness of services inflation, and the sharp rise in
crude oil prices. Moreover, the concurrence of several historically large shocks
accelerated the passthrough of these shocks to prices, leading to a significant increase
in inflation in the third quarter. Against this background, inflation rose by 23.3
percentage points between June and September, reaching 61.5 percent. In the final
quarter of the year, annual consumer inflation ended the year at 64.8 percent on the
back of the improvement in the underlying trend.
Distinguished Guests,
I have summarized the negative impact of the strong course of domestic demand on the
current account balance and financing conditions in the first half of the year. This
process was also accompanied by the decline in international reserves, which led to a
marked deterioration in pricing behavior by increasing volatilities in financial markets. In
the face of these developments, we initiated a strong monetary tightening process in
June 2023 to establish disinflation as soon as possible, to anchor inflation expectations,
and to control the deterioration in pricing behavior. Accordingly, we raised the policy
rate from 8.5 percent to 15 percent in June, to 17.5 percent in July, and to 25 percent in
August. We communicated that the monetary tightening process would continue until a
significant improvement in the inflation outlook was achieved.
As inflation exceeded our projections in the third quarter of the year, and the stickiness
of services prices and the deterioration in inflation expectations continued to exert
upward pressures on inflation, we continued the monetary tightening process in the
September-December period, raising the policy rate from 25 percent to 42.5 percent.
Simultaneously, we simplified the macroprudential framework to enhance the
functioning of market mechanisms and strengthen macro financial stability. We also
supported this process through selective credit tightening and quantitative tightening
measures. In sum, from June through December, we raised the policy rate by a total of
34 percentage points from 8.5 percent to 42.5 percent.
In January 2024, we raised the policy rate to 45 percent, based on our assessment that
inflation expectations and pricing behavior had continued to moderate. Taking into
account the lagged effects of monetary tightening and other policy actions supporting
monetary transmission, we kept the policy rate constant in February.
However, driven by services inflation, the underlying trend of monthly inflation in
February was higher than expected. Taking into account the risks to inflation and the
deterioration in the inflation outlook, we raised the policy rate by 5 percentage points to
50 percent in March. Moreover, we adjusted the monetary policy operational framework
by setting the Central Bank overnight borrowing and lending rates 300 basis points
below and above the one-week repo auction rate, respectively. I would like to reiterate
that this change is a technical correction considering the high level of interest rates. In
other words, the one-week repo rate will remain as our main policy rate.
Distinguished Guests,
In March, despite an ongoing decline, the underlying trend of monthly inflation was
higher than our projections. While imports of consumption goods and gold contributed
to the improvement in the current account balance, other recent indicators implied that
domestic demand remained resilient. On the other hand, our policy decisions in March
led to a significant tightening in financial conditions. We closely monitor the effects of
monetary tightening on credit conditions and domestic demand. Accordingly, although
we kept the policy rate unchanged at our April meeting, considering the lagged effects
of the monetary tightening, I would like to underline that we remain highly attentive to
inflation risks.
The effects of the monetary tightening that we have been implementing since June is
observed on financial conditions, and spilled over into demand conditions to some
extent. In the second half of 2023, external financing conditions improved significantly,
reserves increased, the current account balance improved, the share of Turkish lira
deposits increased and the demand for Turkish lira assets grew stronger. All these
developments contributed to the stabilization of the Turkish lira and the effectiveness of
monetary policy.
Backed by the monetary tightening, 12 and 24-month ahead inflation expectations have
been improving since September. Meanwhile, year-end inflation expectations still hover
above the projections we shared in the inflation reports.
We observe the effects of the decisive steps we have taken within the scope of
simplification as enhanced functionality of the market mechanism and a strengthened
monetary transmission mechanism. As part of this process, the share of the Turkish lira
deposits in the financial system has increased, while that of the FX-denominated and
FX-protected deposits has decreased, which has strengthened monetary transmission
as well as financial stability. The ability of the banking system to fulfill its intermediation
function with maximum efficiency is a prerequisite for a successful disinflation process.
In this context, while implementing simplification, we also take steps to support the
monetary transmission mechanism in case of unanticipated developments in credit
growth and deposit rates. Total credit growth has lost considerable pace since March
due to our monetary and quantitative tightening measures, and we expect it to weaken
the resilience of domestic demand. We thereby expect an upcoming period of a healthy
disinflation process to be accompanied by moderation in domestic demand.
We closely monitor monthly price developments. We will maintain our tight monetary
stance until the underlying trend of monthly inflation displays a significant and sustained
decline and inflation expectations converge to the projected forecast range.
The monetary policy stance will be tightened in case a significant and persistent
deterioration in inflation is foreseen. We anticipate that our decisive monetary policy
stance will bring down the underlying trend of monthly inflation through moderation in
domestic demand, real appreciation of the Turkish lira and an improvement in inflation
expectations. Consequently, disinflation will be established in the second half of 2024.
Esteemed Shareholders, Distinguished Guests,
Before concluding my speech, I would also like to mention the major activities we
carried out throughout the year.
As I have elaborated in the previous part of my speech, we have implemented a strong
monetary tightening as of the second half of 2023 to establish disinflation as soon as
possible, anchor inflation expectations and contain the deterioration in pricing behavior.
However, effective communication and coordination of these policies with other
stakeholders are as important as the implementation of our monetary policy.
Accordingly, we adopted a simple, transparent and two-way communication policy to
explain our policy decisions to all stakeholders in line with our main objective of
achieving price stability and to ensure effective expectations management.
In 2023, we took steps towards a more intensive and effective use of technological and
financial infrastructure. I would like to now mention some of these.
We enhanced the information technology infrastructure in cash transactions and
increased our daily banknote processing capacity through technological investments.
In the field of information technologies, we made further efforts to create the systems
needed in line with our vision of superior technological infrastructure and to ensure the
security and continuity of these systems in 2023.
In view of the considerable interest in the FAST system and the dynamic requirements
of the payments ecosystem, we increased the FAST transaction limits for money
transfers.
We shared the findings of the first phase of the Digital Turkish Lira Project through a
comprehensive evaluation report.
Esteemed Guests,
I would like to underline once again that the CBRT's main objective and priority is to
achieve price stability. In line with this objective, we will continue to make our monetary
policy decisions in a way that will create monetary and financial conditions that will bring
inflation down to single digits first and to the 5 percent target in the medium term.
Concluding my remarks, I would like to thank my valuable colleagues who support the
Bank's activities with great dedication, and I would like to extend my respects to all of
you for your attendance.