Fitch expects inflation in Türkiye to improve with consistent policy
A flag is reflected on the window of the Fitch Ratings headquarters in New York in this February 6, 2013, file photo. Fitch Ratings warned on October 15, 2013, it could cut the sovereign credit rating of the United States from AAA citing the political brinkmanship over raising the federal debt ceiling. (Reuters Photo)
Fitch Ratings Senior Director and Türkiye Analyst, Erich Arispe Morales, expressed confidence in the continuation of Türkiye’s tight monetary policy, predicting improvements in inflation expectations.
Fitch predicts improvement in Türkiye’s inflation expectations
Erich Arispe Morales, Senior Director at Fitch Ratings, emphasized that the agency expects Türkiye’s tight monetary policy stance to remain in place, improving inflation expectations.
However, Morales noted that for inflation expectations to align and decline sustainably, and for dollarization to continue decreasing, the central bank would need to maintain a tight monetary policy.
“Inflation expectations will improve, but for them to align and decline sustainably, and for dollarization to keep falling, the tight monetary policy must continue. We expect a gradual easing in monetary policy to begin in the first quarter of 2025,” Morales stated.
Credit rating upgrade reflects economic program support
Fitch recently upgraded Türkiye’s credit rating from “B+” to “BB-” with a stable outlook. Morales noted that the change in Türkiye’s policy direction following the last general elections contributed to this rating improvement.
He added that the economic program continues to receive support from political leadership, which has strengthened confidence in the country’s future outlook.
Morales also highlighted the increase in international reserves and improvements in the overall economic environment.
“Türkiye’s vulnerabilities have started to improve, which is why we upgraded the credit rating. International reserves have increased, and there has been an improvement in their composition and level this year.”
Inflation, growth projections for 2024-2025
Fitch Ratings projects that Türkiye’s inflation rate will fall to 43% by the end of 2024 and further decrease to 21% by the end of 2025.
While monthly inflationary pressures are easing, Morales warned that household and firm expectations for inflation will decline at a slower pace.
“We foresee inflation dropping to 21% by the end of 2025, which will necessitate gradual easing of monetary policy. Inflation expectations will improve, but a tight monetary stance must continue for sustained improvement and a reduction in dollarization,” he said.
Shift toward export-led growth model in Türkiye
Morales mentioned that Türkiye’s economy is expected to grow by 3.5% in 2024 and by 2.8% in 2025, which will support the rebalancing of inflation expectations.
He also noted that the country is shifting towards a net export-led growth model, balancing internal demand and external factors.
“Türkiye will continue its rebalancing process in 2025, moving from an internal demand-driven model toward a net export-led growth model, which will play a key role in inflation reduction,” Morales added.
Fiscal policy to support inflation reduction
Commenting on fiscal policy, Morales pointed out that the Turkish government had implemented measures to reduce the budget deficit, and he expects fiscal consolidation to contribute to lowering inflation in 2025.
“We expect fiscal consolidation of around 2% next year, which will contribute to the inflation reduction process,” he said.
Fitch forecasts that Türkiye’s foreign reserves will rise to $158 billion by the end of 2024 and reach $165 billion by the end of 2025.
