Central Bank's monetary tightening is just beginning, says İşbank CEO

The CEO of İşbank, Turkey's largest private bank, said today that the country's monetary tightening cycle has just begun but could end by January as inflation expectations are brought under control.

In a speech marking İşbank's 99th anniversary, Hakan Aran said the central bank's gradual interest rate hikes were prudent to avoid shocks to the economy. "I think the gradual increase will continue until inflation expectations improve and interest rates reach a balance in line with inflation, and that this balance can be achieved by the end of the year," he said.

Aran identified rising inflation, high foreign debt and an over-reliance on consumption-driven growth as Turkey's main economic vulnerabilities. He singled out inflation as particularly damaging because of its erosion of incomes. "What is more important is the erosion of incomes and the distortion of income distribution caused by inflation, especially among wage earners and pensioners. I think this is our biggest internal vulnerability," he said.

Turkey faces $267 billion in external debt payments over the next 12 months, raising questions about its ability to finance them with current reserves and external resources, Aran noted.

The İşbank chief said he expects bank lending to shift toward exports and companies' working capital needs, while credit for consumption and imports is likely to contract. Tighter regulations from the Central Bank and the Banking Regulation and Supervision Agency (BRSA) could dampen appetite for the latter, he added.

Aran pointed to the deteriorating global economic outlook as an external headwind for Turkey. He cited rising inflation, monetary tightening, the Russia-Ukraine war, China's economic uncertainties and the prospect of a global recession as creating a challenging international environment.

Despite the difficult situation, Aran stressed that solutions are possible with careful policymaking. "It is very easy to criticize and point out problems, but it is not so easy to propose solutions. There are too many parameters that interact in undesirable ways," he said.