Fitch: Türkiye needs to maintain strict monetary policy to sustain inflation expectations

(MENAFN) Türkiye will need to maintain a strict monetary policy to improve and sustain inflation expectations, according to Erich Arispe Morales, a senior director at Fitch Ratings. Morales made these comments following Fitch’s recent upgrade of Türkiye’s credit rating from B+ to BB- and its stable outlook. This upgrade marks the second such improvement this year, after the rating agency had previously raised Türkiye’s rating from B to B+ in March and adjusted its outlook to positive.

Morales noted that Türkiye's economic conditions began to improve following policy changes implemented after last year’s general elections. The current economic program has received backing from political leadership, which has fostered greater confidence in maintaining a tight monetary policy. Fitch anticipates that Türkiye will start easing its monetary stance gradually in the first quarter of 2025, with a budget deficit expected to consolidate to around 3 percent of GDP from nearly 5 percent this year.

In terms of inflation, Morales highlighted that Türkiye’s Central Bank’s disinflation process is crucial. Recent data from the Turkish Statistical Institute showed a decrease in the annual consumer inflation rate to 51.97 percent in August, the lowest level since July 2023. Fitch forecasts that Türkiye’s inflation will drop to 43 percent by the end of this year and further to 21 percent by the end of 2025. This is somewhat more optimistic than the government’s own forecast, which projects inflation to be at 41.5 percent by the end of 2024 and 17.5 percent by the end of 2025.

Morales also pointed out that inflation expectations among the market, households, and firms are adjusting at different rates. While month-to-month inflation pressures are easing, household and firm expectations are declining more slowly. Fitch is less optimistic than the Central Bank about the speed at which these expectations will be controlled. To foster a sustainable reduction in inflation and further decrease dollarization, Morales stressed that Türkiye must continue with tight monetary policy.

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