Treasury and Finance Minister Mehmet Şimşek on Tuesday vowed that reducing inflation and alleviating related hardships remains the top priority and that there will be no retreat from the goal, nor any changes to the targets set in the government's economic program.
Şimşek also referred to the recent global market volatility, describing it as akin to a temporary panic attack, with its epicenter in Japan but with worldwide repercussions.
The remarks came a day after official data showed Türkiye's annual inflation eased to 61.78% in July, accelerating what is expected to be a sustained slide. It marks the steepest drop in nearly two years and the second consecutive fall after inflation eased to 71.6% in June from the cyclical peak of 75.4% in May.
Şimşek said last month's drop was strong and predicted that the decline would continue in the coming months, although it might not be as pronounced as in July.
"Inflation is our biggest macroeconomic problem. Our program focuses on disinflation, namely achieving permanent price stability and bringing inflation down to single digits. We foresaw a one-year transition period, with the program spanning three years," Şimşek told an interview with private broadcaster A Haber.
Şimşek explained that the transition period ended in June, and annual inflation began to decrease. "The decline in July was significant and will continue in August. The current trend aligns with our program forecasts," he added.
"We have consistently stated that disinflation is challenging and requires time. Our top priority is to alleviate the inflation burden on low-income groups and society at large," said the minister.
"Therefore, we will not back down on this issue, nor will we consider changing our targets. We are determined," he added.
"It may be ambitious, but we will take the necessary measures and continue on our path."
Monthly price growth, the Central Bank of the Republic of Türkiye's (CBRT) preferred gauge, rose to 3.23% in July. In June, monthly CPI inflation was 1.64%.
The annual inflation drop had been expected, mainly due to base effects.
Şimşek said temporary factors caused the monthly rise, echoing views of other officials and the central bank, who had earlier signaled they anticipated a temporary uptick in the monthly readings due to adjustments in administered prices.
The central bank has hiked its policy interest rate by 4,150 basis points since June last year and said it is monitoring inflation risks, vowing to tighten further in the case of a significant deterioration in inflation.
The bank kept borrowing costs unchanged at 50% for a fourth consecutive month in July.
It sees disinflation being established in the second half of the year, forecasting an end-year rate of 38% due to a tight monetary stance, moderation in domestic demand and real appreciation of the Turkish lira.
Şimşek stated there is no concern about meeting year-end targets as he mentioned that the upper band of the inflation forecast for 2024 is set at 42%, expressing confidence that "we will close the year with inflation around 40%."
The minister expects further relief in 2025, which he described as the year of disinflation.
"Inflation cannot defy gravity; it will fall because monetary, fiscal and income policies are designed accordingly. We need time and patience," he said, reiterating that political will and support are crucial.
Markets inched up on Tuesday after a historic sell-off on Monday after a higher-than-expected U.S. unemployment rate on Friday sparked worries the world's No. 1 economy was heading for a recession.
Concerns about the markets were exacerbated by investors winding down yen-funded trades that had been used to finance the acquisition of stocks for years after a surprise Bank of Japan rate hike last week.
The so-called "carry trade" is commonly used in currency markets where investors borrow money from economies with low interest rates, such as Japan or Switzerland, to fund investments in higher-yielding assets – this time stocks – elsewhere.
Şimşek noted that borrowing in Japanese yen has been very cheap for a long time, making it a popular trade in Japan to borrow in yen, convert to dollars, and invest in U.S. stocks.
Japan's benchmark Nikkei 225 rebounded 10% on Tuesday, delivering an initial sense of relief after the index's 12.4% drop on Monday – its biggest daily sell-off since the 1987 Black Monday crash.
Shares in Europe were also trying to recover on Tuesday.
Şimşek pointed out that the yen has appreciated against the dollar in the past month, stating: "At one point, it gained around 13% in value. Interest rates have risen there. Looking at today's market reaction, this is temporary. The critical issue is whether the U.S. can achieve a soft landing. In the near-term, data will be evaluated from this perspective."
U.S Federal Reserve (Fed) policymakers pushed back on Monday against the notion that weaker-than-expected July jobs data means the economy is in recessionary freefall, but also warned that the Fed will need to cut rates to avoid such an outcome.
Discussing the implications for Türkiye, Şimşek emphasized the country could be affected if global growth slows, as it negatively impacts risk appetite.
"However, it also leads to lower oil and commodity prices. The recent drop in oil prices is beneficial for Türkiye's economy, reducing the current account deficit and inflation. If the decline in global commodity prices, especially oil and natural gas, is sustained, it will positively impact Türkiye, as we are a net importer."
The minister stressed that the markets have started pricing a larger and faster interest rate cut by the Fed. He noted that global financial conditions easing in light of these developments benefit emerging markets like Türkiye by potentially influencing capital flows.
Market expectations the Fed would cut rates by 50 basis points at its September meeting remain intact, with futures implying an 85% chance of such a move.
The market has around 100 basis points of easing priced in for this year, and a similar amount for 2025.
"While low growth reduces risk appetite, looser financial conditions work in our favor. We have a compelling story of disinflation and structural transformation, which should mitigate the impact of such turbulence on Türkiye," said Şimşek.
