Fitch's inflation forecast for Turkey

Erich Arispe Morales, Senior Director and Turkey Analyst at international credit rating agency Fitch Ratings, stated that they have high confidence that the tight monetary policy stance in Turkey will be maintained, saying, "Inflation expectations will improve, but for these expectations to be consistent, to fall in a sustainable manner, and for the decline in dollarization to continue, monetary policy will need to remain tight. In this regard, we anticipate that a gradual easing in monetary policy will begin in the first quarter of 2025."

Morales answered questions from an AA reporter regarding the decision after Fitch Ratings upgraded Turkey's credit rating from "B+" to "BB-" on Friday and set the outlook to stable.

Stating that the country's credit outlook began to improve following the policy change after the last general elections in Turkey, Morales expressed that the current economic program continues to receive support from political leadership.

Morales stated that there has been an increase in the credit rating as the vulnerabilities in the Turkish economy have begun to improve, noting that international reserves have increased and that there has been an improvement in the composition and level of international reserves this year.

Drawing attention to the decline in foreign-exchange-protected deposits and dollarization in addition to the improvement in international reserves, Morales said, "Our confidence that the government and economic authorities will maintain a tight monetary policy has increased. We believe that the budget deficit, which is close to 5 percent of the gross domestic product (GDP) this year, will be consolidated to around 3 percent next year. Furthermore, we think that income policies will be more consistent with the Central Bank of the Republic of Turkey's (TCMB) process of reducing inflation. This is an important point because inflation remains the biggest challenge facing Turkey. If inflation does not follow a sustainable path and approach its pre-2021 easing levels, it will continue to create vulnerabilities for Turkey."

INFLATION FORECASTS

On the other hand, Morales underscored that they expect inflation in Turkey to fall to 43 percent by the end of this year and to 21 percent by the end of next year.

Emphasizing that monthly inflation pressures are slowing down, Morales said, "As monthly inflation pressures slow, the market's inflation expectations will adjust accordingly. However, we anticipate that the decline in inflation expectations among households and firms will be slower. It is extremely important for these expectations to decline, but this takes some time."

Morales stated, "When we consider that inflation will fall to the 21 percent level by the end of 2025, this will require a gradual easing in monetary policy. Inflation expectations will improve, but for these expectations to be consistent, to fall in a sustainable manner, and for the decline in dollarization to continue, monetary policy will need to remain tight. In this regard, we anticipate that a gradual easing in monetary policy will begin in the first quarter of 2025."

Stating that they foresee relatively low growth in the Turkish economy of 3.5 percent this year and 2.8 percent in 2025, Morales explained that this level of growth supports the rebalancing process in inflation expectations.

HAD UPGRADED TURKEY'S CREDIT RATING

In Fitch's statement on Friday, it was noted that positive real interest rates, a low current account deficit, and the gradual decline in foreign-exchange-protected deposits would likely support the durability of the improvement in external buffers, and it was stated that reserves are projected to rise to 158 billion dollars by the end of this year and to 165 billion dollars by the end of 2025.

Fitch Ratings had affirmed Turkey's credit rating as "B" in September last year, while changing the outlook from "negative" to "stable" after 2 years.

The credit rating agency had also upgraded the country's credit rating from "B" to "B+" in March this year, while raising the outlook from "stable" to "positive".

News Source: AA