Türkiye’s inflation decline hinges on continued tight monetary policy: Fitch

LONDON

Erich Arispe Morales, Senior Director at Fitch Ratings, emphasized on Monday the necessity for Türkiye to maintain a tight monetary policy to improve and sustainably decrease inflation expectations, anticipating a gradual easing by the first quarter of 2025.

His remarks followed Fitch's recent upgrade of Türkiye’s rating from B+ to BB- and its stable economic outlook, marking the second upgrade this year after the agency previously raised the rating from B to B+ in March.

Speaking to Anadolu, Morales attributed the positive rating upgrades to policy shifts post-last year's elections and continued political leadership support for the current economic program.

“We have greater confidence that the government and economic policy authorities will maintain tight monetary policy, even when they start easing early next year, and we believe that the budget deficit will be consolidated next year to about 3% of GDP from close to 5% this year,” he said.

Morales said income policies will be more in accordance with Türkiye’s Central Bank’s disinflation process, which poses great significance due to inflation remaining “the greatest policy challenge for authorities.”

Türkiye’s annual consumer inflation rate dropped to 51.97% in August, its lowest since July 2023. Fitch anticipates inflation rates of 43% by year-end and 21% by the end of 2025, while the medium-term economic program projects rates of 41.5% and 17.5%, respectively.

Morales noted that while market inflation expectations are adjusting rapidly, household and firm expectations are slower to change. He stressed the need for tight monetary policy to sustain improvement in inflation expectations and continue reducing dollarization, with the Central Bank expected to start easing gradually in the first quarter of 2025.

Morales warned that inflation must decrease sustainably, nearing pre-2021 monetary easing levels to mitigate vulnerabilities. He indicated that anticipated slow economic growth, expected at 3.5% this year and 2.8% in 2025, supports ongoing rebalancing efforts related to inflation.

Türkiye’s GDP is projected to grow by 3.5% next year, reaching 4.5% in 2026, and 5% in 2027, driven by economic reforms and structural adjustments. The country aims for balanced growth supported by domestic demand and exports, seeking policy predictability and credibility.

Discussing fiscal policy’s role in disinflation, Morales foresaw meaningful contributions in 2025 due to reduced earthquake reconstruction costs, predicting a 2% fiscal consolidation. He emphasized the importance of building credibility in monetary policy and reducing political influence to help align economic expectations and reinforce policy stance credibility.