CBRT‘s Karahan: Interest Rate Cuts Dependent on Sustained Inflation Control
ANKARA – Central Bank of the Republic of Turkey (CBRT) President Fatih Karahan underscored that further reductions in interest rates are contingent upon continued success in curbing inflation, during a recent presentation outlining the bank’s monetary policy approach. He emphasized the effectiveness of the current tight monetary policy in driving down inflation, which peaked in 2023 and is projected to continue declining through 2024 and 2025.
Karahan noted the disinflation process is ongoing, albeit at a slowing pace. He reported a decrease in Consumer Price Index (CPI) alongside reductions in key inflation components: services inflation fell to 44.4 percent, thematic goods increased by 18.6 percent, and food inflation decreased to 27.4 percent. However,he identified rent increases (63.6 percent) and education costs (66.2 percent) as significant contributors to services inflation in November.
Positive trends were also observed in cost pressures. Karahan highlighted a “strong improvement” in three key cost indicators, citing a 30-point decrease in domestic Producer Price Index (PPI), a 50-point decrease in service PPI, and a decline in the construction cost index. Crucially, he stated that both consumer and corporate inflation expectations have decreased substantially.
Addressing the question of how market interest rates can fall, Karahan identified three primary factors: inflation, inflation expectations, and risk premium. He explained, using a diagram, that the policy rate initially impacts short-term market interest rates, which are then shaped by both current inflation and expectations for the future. These developments,in turn,influence long-term (credit) market interest rates.
“Interest rate cuts can only be effective when inflation is taken under control,” Karahan stated, adding that historical data demonstrates a correlation between improved inflation expectations and decreased loan and bond interest rates. he also observed an increase in the share of long-term loans within commercial lending during the period of monetary tightening.
Looking ahead, Karahan affirmed the CBRT’s commitment to maintaining a tight monetary policy “until price stability is achieved,” believing this will reinforce the disinflation process through demand, exchange rate, and expectation channels.
“The Board will determine the steps to be taken regarding the policy rate in a way that will ensure the tightness required for disinflation in line with the intermediate targets, taking into account inflation realizations, main trend and expectations,” he said. “The size of the steps is reviewed with a meeting-based and cautious approach focused on the inflation outlook. In case the inflation outlook deviates significantly from the intermediate targets, the monetary policy stance will be tightened.”
