Türkiye’s inflation at turning point, Morgan Stanley projects 2025 shift

U.S.-based global investment bank Morgan Stanley has stated in a recent report that the Turkish economy is at a critical shift, forecasting inflation will decline to around 20% by 2025.

In its report focusing on emerging markets’ 2025 projections, Morgan Stanley highlighted that Turkish economic management has implemented strict macroeconomic policies, reducing macro imbalances and strengthening external buffers.

While the bank anticipated moderate growth for Türkiye in 2025, it noted that core inflation has responded well to monetary tightening, although service inflation remains persistent.

Inflation to drop 26% by end of 2025

The report attributes the recent spikes in service inflation partly to the removal of certain price controls, such as those on rents and specific educational services.

Additionally, elevated inflation expectations and resilient domestic demand have played a role, enabling service sector firms to maintain strong pricing power.

The institution predicts that the Turkish lira will appreciate in real terms during the first quarter of 2025. It also foresees a gradual softening of domestic demand and inflation expectations.

These factors, it explained, support its baseline scenario of headline inflation declining from 44.5% in December 2024 to 26% by the end of 2025.

These forecasts are based on assumptions such as a 30% increase in the minimum wage starting in January and a 25% rise in electricity and natural gas prices in 2025.

Credit ratings signified sustained resilience

As evidence of Türkiye’s improving external resilience, the report emphasized that all three major credit rating agencies have upgraded the country’s ratings by two notches this year.

The analysis pointed to a gradual slowdown in domestic demand, noting that “real gross domestic product (GDP) growth fell from 5.3% in the first quarter of this year to 2.5% in the second quarter, reflecting a more balanced composition between domestic demand and net exports.”

The bank also observed that the slowdown in economic activity persisted into the third quarter. “However, retail sales returned to positive growth in the third quarter, and consumer confidence showed some recovery, indicating resilience in domestic demand,” the report stated.

Inflation beast to be beaten, leading to interest cut cycle

The bank postulated that Türkiye is nearing the start of a gradual interest rate cut cycle, reflecting the Central Bank of Türkiye’s (CBRT) latest inflation insights.

According to Morgan Stanley, CBRT made significant upward revisions on inflation, projecting headline inflation at 21% by the end of 2025 and 12% by the end of 2026.

Morgan Stanley interpreted this forecast as a signal that a measured easing of monetary policy is imminent.

The report added that while the central bank is likely to maintain a tight monetary stance as it begins lowering interest rates, macroprudential measures are expected to remain largely in place.