Central Bank of Turkey Implements Short-term Inflation Objectives
Central Bank of the Republic of Türkiye Announces New Inflation Targets
The Central Bank of the Republic of Türkiye (CBRT) has unveiled a new communication strategy, setting interim targets for inflation to ensure clearer inflation targeting and more stable expectations over the medium term.
In this new approach, the bank has set an interim target of 24% for the end of 2021, a significant decrease from the previous annual inflation rate of 33.52% in July. For the future, the bank has set interim inflation targets of 16% for the end of 2026 and 9% for the end of 2027, with an expectation of stabilizing inflation at 5% in the medium term.
The new strategy includes the concept of "interim targets," which serve as commitment anchors that will not change unless extraordinary circumstances occur. The forecast range for inflation at the end of 2025 is between 25% and 29%, but the official interim target remains at 24%. For 2026, inflation is forecasted between 13% and 19%, with an interim target of 16%. For 2027, the target is set at 9%, moving closer to the medium-term goal of 5% annual inflation.
The CBRT has also made it clear that it adopts a prudent, inflation-focused, and meeting-by-meeting approach when deciding on policy steps and their size. If a significant and persistent deterioration in inflation is foreseen, they will effectively use all monetary policy tools at their disposal.
The bank's resolve to maintain a tight monetary policy stance until price stability is achieved has been reiterated by the central bank governor. This stance is evident in the bank's decision to lower its key policy rate by 300 basis points to 43% last month.
The current account deficit remained moderate in the second quarter, with an estimated deficit-to-GDP ratio of around 1.3%. However, energy commodity prices have risen compared to the previous reporting period due to geopolitical developments.
On a positive note, Turkey started to re-attract capital flows in May as the uncertainty about tariffs waned. The bank aims to terminate the KKM scheme this year, with a notable decline in the volume of FX-protected accounts.
The CBRT's new communication framework for presenting medium-term forecasts is aimed at providing a more transparent and predictable outlook for investors and the general public. The "year-end interim targets" serve as a commitment and anchor, offering a clear path towards the bank's medium-term inflation target of 5%.
In the new communication strategy unveiled by the Central Bank of the Republic of Türkiye, interim targets for inflation have been set for specific years to ensure a stable economy and finance sector in Istanbul. For instance, the interim target for the end of 2021 is 24%, significantly decreased from the previous annual inflation rate, and the bank aims to reach a medium-term inflation target of 5% in the future.
The new approach includes the concept of "interim targets," which serve as commitment anchors for businesses and the finance sector in Istanbul, offering a clear path towards the bank's medium-term inflation target of 5%. The forecast range for inflation at the end of 2025 is between 25% and 29%, but the official interim target remains at 24% for the end of 2021.
