As monthly price pressures ease, market expectations for inflation in Türkiye will adjust accordingly, a senior Fitch analyst said Tuesday, days after the credit ratings agency upgraded the country’s rating for the second time this year.
Fitch revised Türkiye’s long-term foreign-currency Issuer Default Rating to "BB-" from "B+" on Friday, citing improved fiscal policy and better external buffers.
Türkiye has been implementing a tight monetary and fiscal policy since last year to tackle soaring inflation, which peaked at 75% in May. Annual inflation dipped below 52% last month, a slide propelled mainly by the base effects and lower food prices.
The sharp drop is expected to continue in the coming months as the monetary tightening campaign brings price relief.
"As monthly inflation pressures ease, market expectations will also adjust. However, we anticipate that the decline in inflation expectations among households and firms will be slower," Erich Arispe Morales, senior director and Türkiye analyst at Fitch, said.
“The decline of these expectations is extremely important, but this takes some time,” Morales told Anadolu Agency (AA).
The Central Bank of the Republic of Türkiye (CBRT) has hiked interest rates by 4,150 basis points since June last year, to 50%, and has maintained that it will keep its monetary policy tight until inflation aligns with its targets.
To backstop the rate hikes, authorities have also adjusted regulations to tighten credit conditions, and the government has adopted some fiscal tightening measures meant to help ease the current account deficit and rebuild reserves.
The central bank forecasts inflation to slow to 38% at the end of this year and 14% next, projecting it to decline further to 9% by the end of 2026.
In its medium-term economic program released last week, the government projected inflation to drop to 41.5% in 2024, 17.5% in 2025 and 9.7% by 2026.
Fitch forecasts that inflation will decline to 43% by the end of this year and to 21% by the end of 2025.
Morales said a gradual easing of monetary policy could begin as early as the first quarter of 2025, should the inflation trajectory align with expectations.
Some analysts have said they expect a rate cut around November or December, given the disinflation seen in the last few months, coupled with a slowdown in economic growth.
“Inflation expectations will improve, but for these expectations to be compatible, to fall sustainably, and at the same time for the reduction in dollarization to continue, monetary policy will need to remain tight,” Morales noted.
In a statement on Friday, Fitch said that stricter monetary policies, planned budget cuts, and wage adjustments will lead to lower inflation and current account deficits, ultimately helping to maintain better foreign currency reserves.
Fitch also changed its outlook from "positive" to "stable."
In July, ratings agency Moody's upgraded Türkiye's ratings to "B1" from "B3," citing improvements in governance and the tighter stance on monetary policy.
In May, credit ratings agency S&P also upgraded Türkiye's ratings to "B+" from "B," saying that the coordination between monetary, fiscal, and income policy is set to improve amid external rebalancing.
Morales explained that the rating upgrade is tied to the improving vulnerabilities within Türkiye's economy, including a noted increase in international reserves.
He also pointed out the reduction in the foreign exchange-protected deposit scheme, which has weighed heavily on the country's budget, and the decline in dollarization.
"Our confidence that the government and economic authorities will maintain tight monetary policy has increased," said Morales.
Fitch believes the budget deficit, forecast to be close to 5% of gross domestic product (GDP) this year, will consolidate around 3% in 2025, according to Morales.
“Additionally, we expect revenue policies to be more aligned with the central bank's efforts to bring down inflation. This is critical because inflation remains Türkiye's biggest challenge,” he noted.
If inflation does not approach pre-2021 levels – before the monetary policy easing – it will continue to pose a vulnerability, he added.
Fitch projects modest economic growth for Türkiye, estimating a 3.5% expansion this year, which it says would taper to 2.8% in 2025.
The lower growth rates, Morales said, support the rebalancing process in inflation expectations.
"This growth is required to be supported by a predictable and reliable policy framework. Our perspective is that a period of lower growth will be seen as part of this adjustment as well," he noted.
"In this context, 2025 will continue to be a period when the economy continues to rebalance from a domestic demand and consumption-oriented model to a net export-supported growth model, and inflation will be high," he added.
"This is also part of the balancing process."
Morales also elaborated on the role of fiscal policy and its impact on the disinflation process.
He noted that while tax measures have helped reduce the budget deficit, fiscal policy has yet to significantly contribute to monetary tightening efforts this year.
"We explain the domestic demand resistance we saw in the first part of the year with the minimum wage increase and fiscal policy,” Morales said. “Considering the measures taken by the government in the recent period within the scope of fiscal policy, we anticipate fiscal consolidation of around 2% next year, which should contribute to the decline in inflation.”
"We expect improved fiscal policy coherence in 2025, and this is our main point."
Morales emphasized that both domestic and international investors would likely seek further assurance of a consistent policy stance and reduced risks of a policy reversal.
Anchoring inflation expectations and building credibility for monetary policy will take time, he added.
