Exclusive-Turkey cenbank deputy Karahan says fiscal outlook critical in shaping the inflation outlook

By Nevzat Devranoglu

ISTANBUL (Reuters) - Turkey's fiscal outlook will be critical in shaping the inflation trajectory as monetary policy is beginning to yield results, Turkey's 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.

"Undoubtedly, to achieve price stability, the disinflation process must continue robustly...The fiscal outlook will be critical in shaping the inflation outlook in the coming period. In this regard, the Medium-Term Program (MTP) will be outlining a roadmap this week."

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

Hatice Karahan, appointed by Erdogan more than a year ago, is one of the key architect of Turkey's dramatic U-turn toward a more orthodox central bank policy.

"A continuing weakening in the underlying trend of monthly inflation is critical for the disinflation path we are aiming for," Karahan said.

Disinflation began after annual CPI touched 75% 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 was bouncy since the start of the year. Inflation rose by 2.47% 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.

"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 fall to 38% at the end of this year and 14% next, projecting it to fall further to 9% by the end of 2026.

Turkey's economy grew less than expected in the second quarter, expanding an annual 2.5% in the face of a year-long monetary tightening campaign, data showed on Monday.

(Editing by Shri Navaratnam)