By Nevzat Devranoglu
ISTANBUL (Reuters) – Turkey’s fiscal outlook will be key in determining the path of inflation as monetary policy begins to bear fruit, Turkish central bank deputy governor Hatice Karahan said in an interview.
“While monetary policy is starting to yield results with lagged effects, we attach great importance to strong fiscal policy support to ensure that disinflation proceeds in the most effective way,” he told Reuters.
The government will announce later this week its medium-term economic programme, a political roadmap for the next three years.
“To achieve price stability, the disinflation process must undoubtedly continue steadily… The fiscal outlook will be key to determining the inflation outlook in the coming period. In this regard, the Medium Term Programme (MTP) will outline a roadmap this week.”
Since June last year, the central bank has raised rates to 50% and has pledged to remain vigilant against inflation risks after its last policy tightening in March. Annual inflation fell below 52% last month, continuing its slide due to base effects and restrictive policies since an annual peak in May.
Hatice Karahan, appointed by Erdogan more than a year ago, is one of the key architects of Turkey’s dramatic shift toward a more orthodox central bank policy.
“A continued weakening of the underlying trend in monthly inflation is critical to the disinflation path we seek,” Karahan said.
Disinflation began after the annual CPI hit 75% in May, the highest level since late 2022, as a more than year-long monetary tightening campaign began to bring relief to prices.
However, due to one-off effects, monthly inflation remained stable since the beginning of the year. Inflation rose by 2.47% month-on-month in August.
“A continued weakening of the underlying trend in monthly inflation is critical to the disinflation path we seek,” Karahan said.
“We expect items with time-dependent price adjustments, which have recently driven up the underlying trend, to enter a downward trend in the final quarter of the year.”
The central bank expects inflation to fall to 38% by the end of this year and 14% next year, before falling further to 9% by the end of 2026.
Turkey’s economy grew less than expected in the second quarter, expanding 2.5 percent annually amid a year-long monetary tightening campaign, data showed on Monday.