Türkiye’s disinflation goals on track amid tight monetary policy

Türkiye's disinflation process is consistent with the country's goals of a soft landing, leaving behind a year of tight monetary policy in its fight against inflation.

Everyone is focused on the policy rate decisions to be taken by the Türkiye's Central Bank on the last days of the year and its statements on 2025.

Zumrut Imamoglu, economist at the Bank of America Merrill Lynch, told Anadolu 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 it has not shocked the economy, though 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.

Imamoglu 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, adding 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 Central Bank 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.

Imamoglu 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.

Yigit Onay, economist at Deutsche Bank, told Anadolu 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 the Central Bank 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 will reach 37.5% in mid-2025 and 30% at the end of next year, while inflation is expected to be at 25-26%.

He said disinflation will 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 said 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.

Onay mentioned that the real appreciation of the Turkish lira, movements in the US 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, minium wage factors

Kaan Nazli, senior economist and portfolio manager at US-based asset management company Neuberger Berman, told Anadolu that Türkiye's year-end inflation could end up above the Central Bank'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.

Nazli 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 a significant room for improvement, he said.

Nazli estimated that the Central Bank's inflation expectation will 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 US 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 towards longer-term instruments and the improvement in the macroeconomic outlook will make it easier for companies to issue Turkish lira-denominated bonds.

Nazli said international investors showed more interest in Turkish lira-denominated corporate bonds in the early 2010s.

He said an outflow of $2-3 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 the improvement in the macroeconomic outlook and the reduction in exchange rate risks will pave the way for long-term capital inflows.