Türkiye must maintain tight monetary policy to sustainably rein in inflation expectations: Fitch

- Fitch has greater confidence that government and economic policy authorities will maintain tight monetary policy, even when they start easing early next year, he says

Türkiye needs to maintain tight monetary policy for inflation expectations to improve and decline sustainably, while the first quarter of 2025 is expected to bring a gradual easing, Erich Arispe Morales, senior director at Fitch Ratings, told Anadolu on Monday.

Morales' remarks came after Fitch raised Türkiye's rating from B+ to BB- on Friday and set the nation's economic outlook as stable. This upgrade was the second this year by Fitch Ratings after the credit rating agency raised Türkiye's credit rating from B to B+ in March and its outlook to positive.

Morales said the country's rating started improving after policy shifts following last year's general elections, while the current economic program continues to enjoy the support of the political leadership.

“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.”

According to latest data from the Turkish Statistical Institute (TurkStat), Türkiye's annual consumer inflation rate eased to 51.97% in August, the lowest since July 2023.

Fitch expects Türkiye's inflation to decline to 43% by the end of this year and 21% by the end of 2025. According to Türkiye's recently announced medium-term economic program, inflation is expected to be at 41.5% by the end of this year and at 17.5% at end-2025.

Morales said they believe inflation expectations in the country will adapt and improve.

“As month-to-month inflation pressures are slowing down, the market inflation expectations will have adjusted much faster but those of households and also firms are much slower to decline. We think those will adjust but we are less optimistic than the Central Bank in terms of projections as we believe those expectations may take a longer time to bring under control,” he said.

For inflation expectations to start improving and decline sustainably, as well as the process of reduced dollarization to continue, Morales said the monetary policy will have to remain tight.

Thus, the credit rating agency expects the Central Bank to start a gradual easing in the first quarter of 2025.

“Unless inflation comes down on a sustainable trajectory and probably approaches levels pre-monetary easing cycle in 2021, it will remain a vulnerability for Türkiye,” he added.

Morales said the relatively lower economic growth, expected at 3.5% for this year and 2.8% for 2025, supports the rebalancing process regarding inflation expectations.

Türkiye's GDP growth aimed to accelerate to 3.5% next year, 4.5% in 2026, and 5% in 2027 with economic reforms and structural adjustments, according to the government's medium-term economic program.

Türkiye wants to have a more balanced growth mix supported by domestic demand and external factors, as well as predictability and credibility of the policy framework, he said.

“The expectation probably is that this very challenging combination of slowing economic activity and high inflation will continue in the next year, while 2025 will continue to be a period in which the economy continues to rebalance from a domestic demand and consumption-led model to more net exports supported one as a part of the rebalancing process,” he said.

- Fiscal policy to contribute to disinflation process in 2025

Morales said fiscal policy is likely to contribute to disinflation in Türkiye next year as it has not so far this year contributed meaningfully to the tightening of monetary policy.

“We believe that given the recent measures that the government has taken as part of the fiscal policy it will contribute to the disinflation process next year with almost 2% fiscal consolidation, mainly derived from lower earthquake reconstruction costs. Thus we expect improved fiscal policy consistency in 2025,” he said.

Morales also said domestic and foreign investors would like to see more evidence that the current policy stance will retain its credibility and the risk of political influence will fall, while it takes time for economic actors to “re-anchor the inflation expectations to build up the credibility of the monetary policy.”