Türkiye was considering whether or not to update inflation-indexed prices of some critical items, such as fuel, next year, Treasury and Finance Minister Mehmet Şimşek said on Tuesday, as the government aims to keep inflation under control.
Şimşek said the government’s medium-term economic program is working as intended and will be supported by the policies to be implemented next year that will ensure a further decline in inflation.
“We are evaluating whether certain critical regulated prices should be adjusted in line with inflation, not all of them, but some critical items, for example, fuel,” the minister told an event in Istanbul.
Investors closely monitor the increase in regulated prices being lower than inflation, as it signals that the economic management continues to work on reducing inflation. The special consumption tax, which constitutes a significant part of fuel prices, is structured to be increased periodically based on the domestic producer price index.
The domestic producer price index was up 0.66% month-over-month in November for an annual rise of 29.47%, according to official data.
The consumer price inflation stood at 47.09% annually, the lowest level since mid-2023, and 2.24% on a monthly basis. The central bank sees it ending 2024 at around 44%.
“Türkiye is facing a serious inflation problem. One of the main goals of this program is to achieve price stability. The necessary monetary and fiscal policy framework, along with the structural policy framework, revenue policy, and policies on regulated prices, will all support the program in 2025,” said Şimşek.
“There is a significant decline in inflation, and this decline will continue.”
The minister acknowledged public discontent over rising costs of living, reaffirming the government’s commitment to addressing the issue.
“We hear your concerns. While there may be short-term economic slowdowns, we have no doubts about long-term,” he said.
Disinflation, current account
Inflation has eased from a peak of about 75% in May, mainly driven by tightened monetary and fiscal policies.
To curb the growth in price gains, the central bank has hiked rates by 4,150 basis points since June last year and has kept its benchmark policy rate steady at 50% since March.
Expectations have grown in recent weeks that easing could come as soon as this Thursday.
Şimşek noted that while household inflation expectations remain high, they have decreased. But he stressed he’s “having difficulty” in understanding why the real sector expects inflation to rise next year.
He also mentioned that service inflation, which has been rigid and prevented headline inflation from falling at the desired pace, has started to ease, saying that the trend is expected to continue in 2025.
“Core goods inflation is now at 29%, and goods inflation, including food, is below 40%. This downward trend will continue,” he said.
The minister went on to suggest that structural transformation could help the economy achieve a current account surplus in the medium term.
The current account deficit has fallen to 0.8% of gross domestic product (GDP), and Şimşek said it is “most likely” to close the year at 0.7%.
“We are concerned that the current account deficit might rise to 2% next year… (However), if energy prices remain low, the improvement in the current account deficit will not be temporary. There is an impact of energy prices here, but the program also plays a role,” said Şimşek.
“In the medium term, with structural transformation, we can achieve a current account surplus.”
What will happen in 2025?
Şimşek stated that almost all policy elements would support the economic program’s goals next year and said a lower budget deficit would back the continued decline in inflation next year.
“What will happen in 2025? Monetary policy has a strong lagged effect. Since we will reduce the budget deficit through fiscal policy, there will be a negative fiscal impact. We will implement a more supportive revenue policy … The budget deficit will decrease, supporting disinflation,” the minister added.
Şimşek also noted that reserves have seized to be an issue for Türkiye.
“Last year, reserves were a concern, but they are no longer an issue. Net reserves have surpassed $50 billion, which is quite a good level. Therefore, Türkiye has eliminated concerns regarding reserves, provided we continue with the right policies, and we will continue them,” said the minister.
“We have reached reserve adequacy according to international standards as of December.”
Şimşek stressed not all portfolio investments are excessively hot money, underscoring that more than two-thirds of reserve accumulation came from medium- and long-term sources and portfolio preferences within Türkiye.
He repeated that the government does not have an exchange rate target.
“We have no explicit or implicit exchange rate target, and this is my message to the markets. We do not have, and cannot have, an exchange rate target,” the minister added.
