Foreword
Fatih Karahan, Ph.D.
Governor
The Central Bank of the Republic of Türkiye (CBRT) carried on with its activities in 2023, a year in which we were delighted and proud to celebrate the centennial of our Republic, recognizing that the greatest contribution to social welfare could be made by achieving price stability. Accordingly, the CBRT took decisive steps to achieve its primary objective of price stability while also maintaining financial stability.
Consumer inflation stood at 64.8% at the end of 2023. In the first half of the year, inflation declined on the back of base effects, falling import prices, the flat course of exchange rates, and energy subsidies. On the other hand, high credit growth, wage adjustments, and transfers to households accentuated the impact of demand-side factors on inflation. In the second half of the year, the cumulative effects of the ongoing buoyant course of domestic demand, volatile energy prices, exchange rate- driven cost increases, and tax adjustments brought on by earthquake expenditures shaped inflation dynamics. Moreover, inflation rose as a result of the further deterioration in pricing behavior caused by the simultaneous occurrence of all these developments in a short period of time. The stickiness of services inflation, inflation expectations, and geopolitical risks also kept inflationary pressures alive in this period.
The CBRT initiated the monetary tightening process in June 2023 and gradually raised the policy rate from 8.5% to 42.5% in the June-December period in order to establish disinflation as soon as possible, anchor inflation expectations, and contain the deterioration in pricing behavior. Monetary tightening was accompanied by quantitative tightening and selective credit policies as a complement to rate hikes. Concurrently with monetary tightening, the CBRT simplified the macroprudential framework so as to enhance the functionality of market mechanisms and strengthen macro financial stability. Quantitative tightening steps withdrew excess Turkish lira liquidity from the system. Selective credit tightening sought to stabilize demand conditions while preserving the economy’s production capacity. These decisive steps brought about favorable developments in the economy. External financing conditions and the current account balance improved, demand and credit composition and growth normalized, and the share of Turkish lira deposits significantly expanded.
The CBRT will continue to take policy decisions so as to create the monetary and financial conditions that will reduce the underlying trend of inflation and bring inflation to the 5% target in the medium term. With the steps taken in 2023, the CBRT has laid the groundwork for the realization of the disinflation path outlined in the 2023-IV Inflation Report. The effects of monetary tightening on inflation started to be visible in the last quarter of 2023 with the improvement in the underlying trend of monthly inflation. The tight monetary policy stance will remain in place until the underlying trend of monthly inflation displays a significant and permanent decline and inflation expectations converge to the projected forecast range. The monetary policy stance will be further tightened in the event of a significant and persistent deterioration in inflation. The monetary policy stance will bring down the underlying trend of monthly inflation through the rebalancing in domestic demand, the real appreciation of the Turkish lira, and an improvement in inflation expectations. The disinflation process will become evident in the second half of 2024 amid a decline in annual inflation. The monetary policy stance necessary to attain single-digit inflation in 2026 will be resolutely maintained during the disinflation period. This will be followed by a period of stabilization during which quality growth and disinflation will be permanently achieved and predictability will be enhanced.
As we embark on the second century of our Republic, the symbol of our national struggle and the spirit of independence, each of us has crucial responsibilities to further advance our nation. The CBRT’s task is to achieve disinflation as quickly as possible and bring inflation down to single digits in line with its objective of achieving price stability. As it has always been, duly fulfilling this task will be our primary objective in 2024.