Exclusive: Turkey’s Central Bank Deputy Karahan Emphasizes Importance of Fiscal Policy in Combating Inflation

By Nevzat Devranoglu

ISTANBUL – Turkey’s fiscal policy will play a crucial role in maintaining a downward trend in inflation, following recent aggressive interest rate hikes that are starting to show results, according to central bank deputy governor Hatice Karahan in a recent interview.

Karahan emphasized the importance of robust fiscal support alongside the monetary policy, which has started to yield results with delayed effects. She stated that strong fiscal measures are essential to ensure that disinflation continues effectively.

Later this week, the government is set to release its medium-term economic program forecasts, outlining its policy roadmap for the next three years. Analysts view this announcement as a key indicator of Turkey’s commitment to disinflation.

Karahan noted, “To achieve price stability, the disinflation process must continue robustly.” This marks her first media briefing since her appointment to the central bank by President Tayyip Erdogan over a year ago. She expressed that the fiscal outlook will significantly influence inflation trends in the near future, highlighting the importance of the upcoming Medium-Term Programme.

Since June of the previous year, the central bank has raised interest rates to 50% and remains vigilant regarding inflation after its last tightening in March. The annual inflation rate fell below 52% last month, reflecting a decline from its peak in May due to base effects and strict policy measures.

To support rate hikes, authorities have tightened credit conditions and implemented fiscal tightening strategies to alleviate the current account deficit and replenish reserves.

Vice President Cevdet Yilmaz is scheduled to announce the Medium-Term Programme on Thursday at 9 a.m. (0600 GMT), which is expected to emphasize price stability, inflation control, and introduce structural reforms aimed at enhancing predictability.

This year’s budget deficit-to-GDP ratio is anticipated to be revised to around 5% in the programme, along with new budget measures and adjustments to deficit projections.

Karahan is recognized as a key figure in Turkey’s shift towards a more orthodox central bank policy, moving away from previous monetary stimulus measures that contributed to high inflation and currency instability. Disinflation efforts began after the annual Consumer Price Index reached 75% in May, following a long-term monetary tightening policy.

Despite this progress, monthly inflation has shown fluctuations, with a 2.47% increase in August. Karahan stated that reducing the underlying trend of monthly inflation is vital for the ongoing disinflation path.

She expressed optimism that items with time-sensitive price adjustments that have recently driven the underlying trend upward will begin to decline in the final quarter of the year.

The central bank forecasts a reduction in inflation to 38% by the end of this year, followed by a further decline to 14% in the next year and an expectation of 9% by the end of 2026.

Turkey’s economic growth slowed to an annual rate of 2.5% in the second quarter.