Fiscal policy will be crucial in maintaining the downward trend in Türkiye’s inflation as aggressive interest rate hikes start to show results, according to the central bank deputy governor.
“While the monetary policy is beginning to yield results with lagged effects, we place significant importance on strong support from fiscal policy to ensure that disinflation progresses in the most effective manner,” Hatice Karahan told an interview with Reuters.
The government will announce its medium-term economic program forecasts this week, a policy roadmap for the next three years. Some analysts see it as a test of Türkiye’s fiscal commitment to the disinflation drive.
“Undoubtedly, to achieve price stability, the disinflation process must continue robustly,” Karahan said in her first media interview since President Recep Tayyip Erdoğan appointed her to the Central Bank of the Republic of Türkiye (CBRT) more than a year ago.
“The fiscal outlook will be critical in shaping the inflation outlook in the coming period. In this regard, the Medium-Term Program (MTP) will be outlining a roadmap this week.”
Since June last year, the central bank has hiked rates to 50% and has pledged to remain vigilant to inflation risks after its last policy tightening in March. Annual inflation dipped below 52% last month, continuing its slide on the back of base effects and tight policies from an annual peak in May.
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.
Officials say the MTP, which Vice President Cevdet Yılmaz will announce on Thursday at 9 a.m. (6 a.m. GMT), will maintain the government focus on price stability and combating inflation, as well as strengthening predictability with structural reforms.
This year’s budget deficit-to-GDP ratio is expected to be revised in the MTP to 5%, or slightly lower, while new budget measures may also be announced, along with changes in budget deficit projections.
Monthly trend
Karahan is one of the key architects of Türkiye’s U-turn toward a more orthodox central bank policy, which aims to leave behind years of monetary stimulus.
Disinflation began after the annual consumer price index (CPI) touched 75% in May, the highest level since late-2022, as a more than yearlong monetary tightening campaign started to bring price relief.
However, due to one-off effects, monthly inflation has been bouncy since the start of the year. Inflation accelerated by 2.47% month-over-month in August.
“A continued weakening in the underlying trend of monthly inflation is critical for the disinflation path we are aiming for,” Karahan said at the central bank’s offices in Istanbul.
“We expect that items with time-dependent price adjustments, which have recently elevated the underlying trend, will enter a downward trend in the final quarter of the year.”
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.
Türkiye’s economy grew less than expected in the second quarter, expanding an annual 2.5%, but the quarterly growth rate surprised analysts by remaining positive.
The second quarter’s GDP grew by 0.1% from the previous quarter on a seasonally and calendar-adjusted basis, avoiding an expected contraction.
