The International Monetary Fund (IMF) on Thursday commended the policy shift Türkiye has pursued since last year mainly through aggressive tightening to bring inflation down.
The fund has been “very favorably impressed” by the monetary policy pivot, Alfred Kammer, director of the European Department at the IMF, told Anadolu Agency (AA).
Türkiye’s central bank launched an aggressive tightening cycle in June 2023 that saw it lift its benchmark policy rate to 50% from 8.5%. The last time raised the one-week repo rate was in March, when it hiked by 500 basis points. Since then, it has kept policy rate on hold.
The government raised taxes and some fees to boost income, while implementing fiscal measures to balance risks in the economy.
Kammer said that there are two main results of the policy change – vulnerability to a crisis risk that has been greatly reduced over this time, and inflation now on a downward trajectory.
“Those are two huge achievements in this policy pivot that took place when it comes to our policy advice,” he said at a Regional Economic Outlook for Europe news conference at the IMF Annual Meetings in Washington, D.C.
IMF earlier said higher interest rates since June last year have reduced economic imbalances and revived confidence, adding that improved market sentiment had prompted foreign and domestic investors to shift into Turkish lira-denominated assets.
Inflation hit a peak of 75% in May, but has been slowing since and fell to 49.4% in September – dipping for the first time in the current cycle below the benchmark interest rate.
Kammer, however, cautioned Türkiye’s fight against inflation has not yet been won, meaning that the tight policy will need to be maintained, and it would be premature to reduce the restrictiveness.
The government forecasts the annual inflation will fall to 41.5% in 2024 and 17.5% next year. The Central Bank of the Republic of Türkiye (CBRT) sees it dropping to 38% at the end of this year.
The IMF sees it standing at 24% by the end of next year.
The CBRT last week warned a bump in recent inflation data lifted uncertainty, a hawkish signal that could reinforce views that policy easing will not begin until next year.
It is expected to wait until December or January to cut interest rates, according to the latest surveys. It is forecasted to cut rates by 20 points to 30% by the end of 2025.
Kammer advised “a focus on income policies.”
“One of the problems in Türkiye and nexus to inflation was minimum wage increases, which were based on backward-looking inflation developments,” he noted.
“We need to have these minimum wage agreements, which are now once a year, done in a forward-looking way, in order to avoid the second round effect of these measures.”
IMF’s mission chief for the country, Jim Walsh, this week also said Türkiye should avoid a repeat of its last inflation-fueling minimum wage hike when the next raise is due on Jan. 1 and focus on support measures for the poorest part of the population instead.
Ankara is expected to announce in December by how much it will raise the minimum wage at the start of 2025 after delivering a 49% hike in January of this year, which pushed inflation sharply higher in the first quarter.
Market expectations for the January minimum wage hike stand at around 25%, according to bankers.
Kammer, moreover, advised the use of “more fiscal adjustment,” which would help on the inflationary side and also enhance the credibility of the adjustment efforts.
“Overall, I should say to the economic team working in Türkiye: A job well done. That job needs to continue, and these policies need to be sustained,” he noted.
“This is a painful period to go through for the population of Türkiye and is a tough period for policy makers, but it’s necessary to what crisis risk and bring inflation down.”
