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Turkey’s new central bank chief said some of President Recep Tayyip Erdoğan’s policies were complicating the task of controlling stubbornly high inflation as he vowed to take further action if needed to restore price stability.
Fatih Karahan was making his first public appearance as head of the central bank less than a week after replacing Hafize Gaye Erkan. She resigned last Friday, blaming a smear campaign against her in the domestic media.
The new bank chief said annual inflation was expected to fall to 36 per cent by the end of 2024, from nearly 65 per cent last month, but he also warned that Erdoğan’s big increase in the minimum wage, which took effect in January, had exceeded the central bank’s targets.
Karahan added that the 49 per cent minimum wage boost was among the factors that had led to a nearly 7 per cent increase in consumer prices between December and January.
He said he expected that the series of sharp interest rate rises pushed through by the central bank since June, which have brought the benchmark one-week repo rate from 8.5 per cent to 45 per cent, would be sufficient in achieving its inflation targets, but that “we stand ready” to act if there is any deterioration in the outlook.
Inflation expectations, wage and tax policy and companies’ price-setting activities will all factor into whether the central bank must raise rates further, he said.
Karahan’s commitment to continuing the tight monetary policy of his predecessor has been welcomed by investors, who applauded the sharp increase in borrowing costs during Erkan’s eight-month tenure as governor.
The interest rate rises are a key pillar of a new economic programme that kicked off after Erdoğan’s re-election in May. The Turkish president, a longtime opponent of high borrowing costs, has thus far backed his economic team’s move towards higher interest rates. But economists have long warned that Erdoğan may unleash fresh stimulus measures ahead of key local elections scheduled for late March.
Karahan said on Thursday that while inflation was likely to accelerate during the first half of this year, the central bank expected to make significant progress in the next months and years. He said the bank expected inflation to fall to 14 per cent by the end of next year and reach single digits in 2026.
He also said that despite the setback in inflation in January, there were indications that tight monetary policy was slowing consumer demand, which had been one of the key drivers of runaway inflation in recent years. For example, Karahan said price inflation for cars, long-lasting consumer goods and appliances had begun easing in recent months.
Karahan acknowledged, however, that the central bank’s main task was to reset consumers’ inflation expectations. In recent years, consumers have rushed to buy goods immediately rather than delay purchases over fears that prices will always be much higher tomorrow.
Karahan, a former New York Federal Reserve economist, served as deputy to Erkan, who was appointed as the bank’s first female chief last year. His elevation to the job means Erdoğan has now hired six central bank chiefs in five years.
