Policy consistency to help lower inflation, boost reserves: Fitch

LONDON

Expected post-election fiscal tightening would strengthen the effectiveness of Türkiye’s monetary policy, in the context of weakened transmission channels, Fitch Ratings has said. 

“If sustained, this improvement in policy consistency should support lower inflation, a narrower current account deficit and a recovery in international reserves,” the rating agency added.

Fitch believes the economic policy mix implemented since June 2023 will be maintained despite the opposition Republican People’s Party (CHP) winning the largest share of the vote in Türkiye’s local elections at the end of March.

“We, therefore, continue to expect a significant decline in inflation and easing of external vulnerabilities. This assessment was a key factor underpinning our upgrade of Türkiye’s rating to ‘B+’ with a positive outlook on March 8,” Fitch said.

Türkiye has demonstrated commitment to fighting inflation under the new policy mix, according to Fitch.

Continued political backing was reflected after the local elections when President Recep Tayyip Erdoğan restated his support for the program of the economic team led by Finance Minister Mehmet Şimşek, Fitch stressed.

It noted that in the run-up to the local elections, fiscal spending accelerated, leading to a widening of the budget deficit.

On a four-quarter rolling basis, Fitch estimates that the central government budget deficit reached 5.2 percent of GDP in the first quarter of 2024, with the primary deficit at 2.6 percent.

“We believe the government will reduce the fiscal deficit in the rest of 2024 by slowing spending growth, especially that which is not related to earthquake reconstruction. This would be consistent with comments by Şimşek,” it said.