Central Bank of the Republic of Türkiye (CBRT) Governor Fatih Karahan presented the Inflation Report 2025-II at a press briefing in Istanbul on Thursday.

Karahan reaffirmed the CBRT’s resolute commitment to maintaining a tight and proactive monetary policy stance, underscoring the Bank’s determination to achieve a sustained disinflation trajectory and restore price stability.

This comes at a critical juncture as Türkiye navigates both global economic uncertainties and a domestic rebalancing of economic activity, with inflation remaining a key concern for policymakers and citizens alike.

Disinflation Gains Momentum Since Mid-2024

Governor Karahan highlighted the steady progress in Türkiye’s disinflation process, which has been underway since June 2024. He attributed this progress to the CBRT’s stringent monetary policy measures and a noticeable moderation in domestic demand. “The underlying trend of inflation has been declining steadily. We are seeing a more pronounced drop in services inflation, while goods inflation continues to remain subdued,” Karahan stated. Official data supports this assessment, with consumer inflation falling to 37.9% in April 2025, a significant decline from its peak earlier in 2024. Preliminary figures for May suggest that this downward trend in inflation has persisted, providing cautious optimism for the CBRT’s efforts.

Karahan also addressed the resilience of Türkiye’s economy in the face of external shocks, particularly those in March and April 2025. These shocks included heightened financial market volatility and the announcement of sweeping U.S. tariffs on April 2, which impacted over 180 countries and disrupted global trade dynamics. Despite these challenges, the CBRT’s proactive measures—such as tightening monetary conditions and implementing targeted interventions—helped stabilize financial markets and mitigate macro-financial risks, ensuring that inflationary pressures did not spiral out of control.

Global Uncertainty Poses Ongoing Risks

Turning to the international landscape, Karahan painted a sobering picture of global economic conditions, emphasizing the persistent uncertainty that continues to affect monetary policy decisions worldwide. The introduction of new U.S. trade tariffs in April 2025 has heightened global trade tensions, although recent bilateral negotiations have slightly alleviated some of the immediate pressures. Nonetheless, downside risks to global growth and inflation remain significant, with ripple effects felt across both advanced and emerging economies.

Global financial markets have experienced sharp fluctuations in response to these developments, as evidenced by volatility in the VIX index—a widely watched measure of market fear—alongside movements in bond yields and commodity prices. Karahan warned that these global dynamics present complex trade-offs for economies like Türkiye, where external inflationary pressures must be balanced against the need to support domestic growth. “The global environment remains a key challenge, and we are closely monitoring these developments to ensure they do not derail our disinflation path,” he noted.

Domestic Economic Rebalancing Underway

On the domestic front, Karahan provided an in-depth analysis of Türkiye’s economic activity, noting a significant rebalancing of demand throughout 2024. Net exports have emerged as a positive contributor to economic growth, offsetting a slowdown in domestic demand. Household consumption, which had previously shown resilience due to early purchases and retail campaigns, is now displaying signs of cooling. Recent data on retail sales and card spending indicate a marked slowdown in household consumption in early 2025, aligning more closely with the CBRT’s disinflation objectives.

Industrial production and services sector activity have shown moderate recovery, though Karahan cautioned that capacity utilization in the manufacturing sector remains below its historical averages, signaling underutilized economic potential. Labor market dynamics also reflect this rebalancing, with the headline unemployment rate declining but broader measures indicating persistent slack in the labor market. “We expect demand conditions to increasingly support our disinflation path as we move into the second quarter of 2025,” Karahan projected.

The current account deficit, a longstanding concern for Türkiye, has narrowed significantly, reaching 0.8% of GDP in late 2024. However, the CBRT anticipates a slight uptick in 2025, driven by energy and commodity price dynamics, which remain sensitive to global market conditions.

CBRT’s Decisive Monetary Policy Actions

Karahan detailed the CBRT’s recent policy measures, which were implemented in response to the financial market turbulence earlier in 2025. At the April 17 Monetary Policy Committee (MPC) meeting, the CBRT raised its policy rate to 46%, signaling its commitment to curbing inflationary pressures. Additionally, the overnight lending rate was increased to 49%, further tightening monetary conditions. To address exchange rate volatility and support the Turkish lira, the CBRT introduced new liquidity tools and initiated FX forward sales, while temporarily suspending repo auctions and extending deposit maturities.

These measures were critical in countering the growing exchange rate pass-through effects and price pressures, particularly on durable goods and import-intensive items. Karahan noted that, compared to previous years, the impact of recent exchange rate movements on inflation has been relatively limited, reflecting the effectiveness of the CBRT’s policies. A significant milestone in this regard is the sharp decline in the KKM (FX-protected deposit) stock, which has fallen from a peak of $140 billion in 2023 to $17 billion in 2025. This reduction has reinforced the dominance of the Turkish lira in the financial system, strengthening the transmission of monetary policy.

Inflation Projections and Risk Factors

The CBRT maintained its medium-term inflation forecasts, projecting end-2025 inflation at 24% and end-2026 inflation at 12%, with a medium-term target of 5%. Despite the recent volatility in global and domestic markets, these forecasts remain unchanged, thanks to the offsetting effects of lower global commodity prices, the CBRT’s policy tightening, and ongoing structural reforms. However, Karahan acknowledged several upside risks to inflation, including recent agricultural frosts that may drive up unprocessed food inflation and persistent backward indexation in services sectors such as rents and education. On a positive note, services inflation has declined by over 40 percentage points over the past year, signaling progress in one of the more stubborn components of inflation.

The CBRT also revised its assumptions for 2025, increasing its forecast for food inflation while lowering projections for crude oil and other import prices. The net impact on overall inflation projections was minimal, providing some reassurance about the Bank’s ability to manage inflationary pressures.

A Firm, Flexible, and Data-Driven Policy Stance

Governor Karahan reiterated that the CBRT’s monetary policy decisions will remain data-driven, with each MPC meeting serving as an opportunity to assess inflation expectations, underlying trends, and global economic developments. “We will not hesitate to tighten monetary policy further if we observe a significant and persistent deterioration in the inflation outlook,” he declared, emphasizing the CBRT’s readiness to act decisively to safeguard price stability.

Karahan underscored the broader significance of the CBRT’s mission, stating, “Price stability is a prerequisite for sustainable economic growth and improved social welfare. We are fully committed to doing whatever it takes to bring inflation down in line with our targets.” This commitment reflects the CBRT’s broader goal of fostering a stable economic environment that supports long-term growth and improves living standards for Turkish citizens.

Engaging with Stakeholders

The press briefing concluded with an interactive Q&A session, during which CBRT Deputy Governors fielded questions from journalists, economists, and financial analysts. Topics ranged from the potential impact of global trade tensions on Türkiye’s export-driven growth to the CBRT’s strategies for managing exchange rate volatility in the coming months. The session provided valuable insights into the Bank’s thinking and reinforced its commitment to transparency and communication with the public.

As Türkiye continues to navigate a complex economic landscape, Governor Karahan’s address underscored the CBRT’s determination to remain vigilant, adaptable, and focused on its core mandate of achieving price stability. With inflation still above target levels, the road ahead remains challenging, but the CBRT’s proactive stance offers hope for a more stable economic future. (ILKHA)