Türkiye’s disinflation path is consistent with the country’s goals of a soft landing, economists opined recently as the country leaves behind a year of tight monetary policy in its fight against inflation, with expectations for the increase in prices to continue to subdue.
Everyone is focused on the policy rate decisions to be taken by the Central Bank of the Republic of Türkiye (CBRT) in the last days of the year and its statements on 2025.
Zumrut Imamoğlu, economist at the Bank of America Merrill Lynch, told Anadolu Agency (AA) on Tuesday that the bank revised its year-end inflation projections from 42% to 44%-45% due to rising food prices in Türkiye, though she said it was not a major revision.
She said the course of inflation is on the right path and the comprehensive anti-inflation program covers many areas, noting that the central bank’s tightening cycle has been gradual and has not shocked the economy. However, there is still a waiting period.
Despite growth figures reporting a scenario that is technically characterized as a recession, it has, in fact, been a flat course; as she said, the Turkish economy is not facing a very serious crisis or a recession.
Imamoğlu highlighted that a disinflation process is definitely being experienced within this framework of a soft landing in this policy mix, albeit a little slower than the central bank’s projections. She added that there is not much to be disappointed about at this time, and the direction of inflation poses more importance, and currently, it is consistent with the soft landing goals.
She stated that she expects the first interest rate cut to be 250 basis points in December, but it may be slightly lower, as they expect the CBRT to exercise more caution after starting with a small rate cut, as these cuts depend on data and surprises may arise, and since it is necessary to cut rates to maintain monetary policy, which investors also find reasonable.
Imamoğlu said the inflation forecast is 25% for the end of 2025 and the economic growth estimate for next year is 2.5%. She noted that they expect inflation to return to 15%-16% by the end of 2026, which would improve the investment environment.
Gain in credibility
Yiğit Onay, an economist at Deutsche Bank, told AA that he expects the central bank to cut its interest rate by 250 basis points at the end of December; while it may stay on the cautious side depending on the inflation data, the increase in next year’s minimum wage and other dynamics.
Onay said that the bank has gained significant credibility since last year and helped change the perception of the Turkish lira among domestic investors.
The key point is that the bank’s decision will depend on data, he said, and this approach will keep monetary conditions tight enough to prevent a re-dollarization in the economy, as it will monitor inflation developments and portfolio preferences of domestic investors to assess the tightness.
Onay said he expected the policy rate to reach 37.5% in mid-2025 and 30% at the end of next year, while inflation is likely to be at 25%-26%.
He said disinflation would be a little slower than expected, though he projects a sustainable decline in inflation derived from signs such as the appreciation of the Turkish lira in real terms and easing cost pressures. He added the balance between inflation and growth may become more pronounced next year, while economic activity and employment may face more pressure due to the tight monetary policy.
The Deutsche Bank economist mentioned that the real appreciation of the Turkish lira, movements in the U.S. dollar/euro exchange rate, and Europe’s weak economic growth may introduce complications to the balance, adding that the central bank needs to prioritize price stability to anchor inflation estimates throughout 2025 given the expected economic slowdown.
He added that a hard landing probability is low, and in case of a more severe economic slowdown, authorities are not expected to implement targeted support policies to help key sectors.
Inflation, minimum wage factors
Kaan Nazlı, senior economist and portfolio manager at U.S.-based asset management company Neuberger Berman, said that Türkiye’s year-end inflation could end up above the CBRT's 44% estimate, adding that the disinflation process will accelerate in the coming months, while weak domestic demand conditions and low oil prices will help.
Nazlı said the bank may cut the policy rate by 150-250 basis points at the end of December, led by developments in inflation in the first three weeks of the month and the course of minimum wage negotiations.
The bank will exercise caution in the first few months, which is why estimating a 20-point interest rate cut within this year is too optimistic, though it has significant room for improvement, he said.
Nazlı estimated that the central bank’s inflation expectation would be around 30% and its policy rate at around 35% by the end of 2025, though an increase in oil and natural gas prices due to geopolitical risks or uncertainties about future U.S. monetary policy could affect this.
He highlighted that a capital inflow of $23 billion into the bond market was seen this year, including $16 billion in direct purchases.
These are generally short-term investment instruments, he said, and as inflation falls more permanently and rate cuts continue, investments are expected to turn toward longer-term instruments and the improvement in the macroeconomic outlook will make it easier for companies to issue Turkish lira-denominated bonds.
Nazlı said international investors showed more interest in Turkish lira-denominated corporate bonds in the early 2010s.
He said an outflow of $2 billion to $3 billion was seen in stocks this year led by global risks and uneasiness about the exchange rate, but there is still some interest in the banking and automotive sectors by stock investors, who took part in a recent investor meeting held in London.
He added that improving the macroeconomic outlook and reducing exchange rate risks will pave the way for long-term capital inflows.