The Turkish central bank said on Friday that it will maintain its tight monetary stance until inflation shows a sustained decline, following its surprise decision last Thursday to raise its key policy rate.
The bank hiked its one-week repo rate to 46% from 42.5%, reversing its policy easing cycle, citing in part a slight rise in inflation expectations after a sell-off in the Turkish lira and other assets last month following the detention of Istanbul Mayor Ekrem Imamoğlu.
Imamoğlu was arrested in late March on corruption charges.
“Inflation expectations and pricing behavior continue to pose risks to the disinflation process,” the Central Bank of the Republic of Türkiye (CBRT) said following the decision. It also lifted the overnight lending rate to 49%.
The bank started easing in December, when the rate was 50%, marking the apparent end of an aggressive tightening effort since mid-2023 to bring down soaring prices.
In the minutes of last week’s rate-setting meeting, the bank on Friday said it will maintain its tight monetary stance until inflation shows a sustained decline.
Annual inflation slowed to 38.1% in March, extending its fall from a peak of around 75% last May. The central bank’s year-end inflation midpoint estimate currently stands at 24%, in a forecast range of 19% to 29%.
The minutes cited slowing domestic demand, a stronger lira currency, and improved expectations as signs the disinflation process is taking hold.
The bank also said it resumed one-week repo auctions and took additional steps to support monetary transmission amid recent market volatility.
Inflation expectations
Earlier on Friday, a survey by the CBRT showed inflation expectations edged up in April for businesses and market participants, and remained steady at 59.3% in 12 months for households.
The real sector’s inflation expectations for the same period increased 0.6 points to 41.7% in April, the Central Bank of the Republic of Türkiye (CBRT) survey data showed.
Market participants’ expectations rose by one percentage point to 25.6%, leaving a wide gap with households.
Treasury and Finance Minister Mehmet Şimşek said that although there was a slight increase in expectations compared to the previous month, a significant improvement was still observed on an annual basis.
“Over the past year, inflation expectations for 12 months from now have decreased by 17 points among households, 15 points in the real sector, and 10 points among market participants,” Şimşek wrote on social media platform X.
“All necessary measures are being taken to limit the impact of recent domestic and global developments on our economy,” said the minister.
In addition to strengthening macroeconomic fundamentals through the government’s medium-term program, tightening financial conditions and declining commodity prices will support the disinflation process, said Şimşek.
“We anticipate that inflation will fall within the CBRT’s forecast range by the end of the year.”
CBRT Governor Fatih Karahan on Wednesday said monetary policy has been “proactive” and has contained re-dollarization risks, with retail foreign exchange demand limited.
Karahan said policy transmission, or effectiveness, has improved considerably over the last year and that disinflation is continuing.
“Monetary policy has been proactive,” his presentation to foreign investors and others in Washington said. “Re-dollarization risks are contained by a decisive, tight policy stance.”
Though he added: “Risks are alive” on the disinflation path, and that the economic growth outlook is “highly uncertain” due to global trade tensions.
Karahan said the weaker currency’s pass-through effect on inflation is modest, reflecting improvement in pricing behavior, while falling oil prices support disinflation, but the global economic outlook is uncertain.
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