Türkiye has taken robust measures in monetary policy and is close to anchoring inflation, which is expected to fall as of the second half of next year, Treasury and Finance Minister Mehmet Şimşek said Tuesday.
"We have taken very strong steps in fiscal and monetary policy. We are coming toward the thresholds that will anchor inflation," Şimşek told a televised interview with broadcaster A Haber.
He said they expect a loss of momentum in monthly inflation soon while not anticipating a fall on an annual basis until at least the second half of 2024.
Annual inflation rose to more than 61% in September, according to official data, and is expected to rise further toward the end of the year.
Şimşek, alongside Hafize Gaye Erkan, the governor of the Central Bank of the Republic of Türkiye (CBRT), is part of the economy team President Recep Tayyip Erdoğan named after winning reelection in the May elections.
The group of technocrats with Wall Street experience and broad support among foreign investors have been reversing the yearslong easing cycle and embraced more conventional economic policies, including aggressive monetary tightening.
Last month, the country’s central bank raised its key interest rate by 500 basis points to 30%, tightening policy for four straight months. Since the June policy pivot, it has hiked rates by 2,150 basis points to rein in stubborn inflation.
"Monetary policy comes into play with a delay, the effect of the measures we have taken today shows itself months later, and it will take time for us to get the results," Şimşek said.
The government sees inflation at 65% at year-end, a target Şimşek says is still valid. He noted the possibility of revisions based on periodicity, a matter he says is under the jurisdiction of the CBRT.
Şimşek said he expects foreign fund flows to increase as Türkiye implements its medium-term economic program, with the country attracting interest despite global headwinds.
Despite being in the early stages of the program, he stated, “We expect the flow of funds from abroad to intensify in the coming period.”
Yet, Şimşek acknowledged the challenging context, emphasizing that the current global scenario was not favorable.
"The wind is not behind us and it is blowing from the opposite side. Growth in the European region is below 1%. External demand is seriously weak. Global demand is also tight. This predicts a serious tightening," the minister said.
"Interest rates in world markets are high and will remain high. The strengthening of the dollar is against us. We sell products for euros, but we buy raw materials with dollars."
Regarding the regional conflicts, led by the latest clashes between Israel and the Palestinian resistance group Hamas, he expressed caution, hoping for them to be temporary and limited.
Şimşek emphasized the government's efforts to mitigate inflationary effects, as he cited liberalization of the exchange rate that was held stable for an extended period, additional budgetary measures and an increase in wages that were promised during the election period.
He suggested that the inflationary effects of these measures would wane by the second half of 2024.
Addressing a news conference after the Cabinet meeting on Monday, Erdoğan announced the government would spend about TL 61 billion ($2.20 billion) to extend a one-time payment of TL 5,000 to pensioners to help ease the inflation pressure, stressing that Türkiye was reaching an end of “hysterical pricing behavior.”
“We pushed the budget limits to the maximum, and a one-time payment for retirees was agreed upon during the Cabinet (meeting),” said Şimşek.
“This year, we provided substantial real wage increases to all sectors of society, beyond our real economic growth,” he noted.
Şimşek acknowledged the importance of aligning income policies with the goal of achieving a permanent single-digit inflation rate. He stressed the need for a compatible wage increase structure to achieve this objective.
“A system of wage increases compatible with inflation is necessary,” the minister said.
Şimşek also highlighted Türkiye has entered the positive real interest rate path, indicating the stabilization of the Turkish lira and minimizing the factors that previously contributed to its depreciation.
"There is no reason for the lira to weaken permanently from now on."
The lira has depreciated some 30% against the U.S. dollar this year, with most of the declines taking place following the May vote. The currency traded at 27.7281 to the dollar on Tuesday.
Şimşek said he plans to visit Abu Dhabi, Doha, and Riyadh in the next few weeks. Türkiye and the United Arab Emirates (UAE) signed multiple lucrative deals estimated to be worth $50.7 billion during Erdoğan's tour of the three Gulf countries in mid-July.
"This will be the last visit for the first concrete steps of the UAE (investment) program,” said Şimşek.
The minister also announced plans for visits to the Far East, further underlining the government's commitment to international collaborations and investments.
Among others, Şimşek also discussed the increase in foreign exchange reserves, noting its significance in the current market conditions. Turkish central bank's net international reserves have recovered strongly and increased by more than $30 billion in around four months.
"The accumulation of reserves is important and will continue as long as market conditions allow," the minister noted.
In addressing the trade deficit, Şimşek emphasized the ongoing process of rebalancing the economy, focusing on exports as a top priority.
"We will continue to increase export loans. Export is our top priority ... We will mobilize all our resources for exports," the minister noted.
He pointed out abnormal levels of gold imports due to negative real interest rates. However, he expressed confidence that the normalization of monetary policy would lead to a decline in demand.
Furthermore, he outlined domestic initiatives such as increased energy production from local resources and green transformation, aiming to reduce the nation's dependence on imports.
These efforts, he stated, would lead to a decrease in the trade deficit by at least 1%. "The reduction in gold imports would also reduce the current account deficit by at least 1%," Şimşek said.
"When we reduce the current account deficit to below 3% (of gross domestic product), the direct fund flow will finance half of it, and the remaining fund flow will go to the reserve accumulation."
