Turkey cenbank deputy Karahan says fiscal policy critical to slay inflation

Turkey's fiscal policy will be critical to ensure that inflation remains on its downward path now that aggressive interest rate hikes are beginning to yield results, central bank deputy governor Hatice Karahan said in an interview.

"While the monetary policy is beginning to yield results with lagged effects, we place significant importance on strong support from fiscal policy to ensure that disinflation progresses in the most effective manner," she told Reuters.

The government will announce its medium-term economic programme forecasts later this week, a policy roadmap for the next three years. Some analysts see it as a test of Turkey's fiscal commitment to the disinflation drive.

"Undoubtedly, to achieve price stability, the disinflation process must continue robustly," Karahan said in her first media interview since President Tayyip Erdogan appointed her to the central bank more than a year ago.

"The fiscal outlook will be critical in shaping the inflation outlook in the coming period. In this regard, the Medium-Term Programme (MTP) will be outlining a roadmap this week."

Since June last year, the central bank has hiked rates to 50 per cent and has pledged to remain vigilant to inflation risks after its last policy tightening in March. Annual inflation dipped below 52 per cent last month, continuing its slide on the back of base effects and tight policies from an annual peak in May.

To backstop the rate hikes, authorities have also adjusted regulations to tighten credit conditions and the government has adopted some fiscal tightening measures meant to help ease the current account deficit and rebuild reserves.

Officials say the MTP, which Vice President Cevdet Yilmaz will announce on Thursday at 9 a.m. (0600 GMT), will maintain the government focus on price stability and combating inflation, as well as strengthening predictability with structural reforms.

This year's budget deficit-to-GDP ratio is expected to be revised in the MTP to 5 per cent, or slightly lower, while new budget measures may also be announced, along with changes in budget deficit projections.

Karahan is one of the key architects of Turkey's dramatic U-turn toward a more orthodox central bank policy, which aims to leave behind years of monetary stimulus under Erdogan that sent inflation soaring and set off a series of currency crashes.

Disinflation began after annual CPI touched 75 per cent in May, the highest level since late-2022, as a more than year-long monetary tightening campaign started to bring price relief.

However, due to one-off effects, monthly inflation has been bouncy since the start of the year. Inflation accelerated by 2.47 per cent month-on-month in August.

"A continued weakening in the underlying trend of monthly inflation is critical for the disinflation path we are aiming for," Karahan said at the central bank's offices in Istanbul.

"We expect that items with time-dependent price adjustments, which have recently elevated the underlying trend, will enter a downward trend in the final quarter of the year."

The central bank forecasts inflation to slow to 38 per cent at the end of this year and 14 per cent next, projecting it to decline further to 9 per cent by the end of 2026.

Turkey's economic growth dipped in the second quarter to an annual 2.5 per cent rate.