Treasury and Finance Minister Mehmet Şimşek on Tuesday projected a stricter fiscal policy framework for 2025, reaffirming the government’s commitment to its disinflation strategy, despite acknowledging the complexity and time required to achieve its goals.
“Inflation will continue to decline due to the lagging effects of monetary policy. Additionally, fiscal policy is set to be tighter than this year,” Şimşek told the Tourism Investment Forum in Istanbul.
For almost a year and a half, authorities have pursued strict monetary and fiscal policies as the government has pledged to cool inflation, change the composition of economic growth and attain sustainable levels.
Tight monetary policy, fiscal measures and base effects brought annual inflation down to 48.58% in October from a peak of 75.45% in May.
Şimşek said Türkiye is expected to close 2024 with an inflation rate of 44%-45%, slightly exceeding initial targets.
Earlier this month, the country’s central bank raised its year-end inflation forecasts for this year and next to 44% and 21%, respectively. It previously forecast year-end inflation of 38% in 2024 and 14% next year.
The government anticipated end-2024 and end-2025 inflation of 41.5% and 17.5%, respectively.
Şimşek urged patience and stressed determination in the disinflation process, stating, “We will achieve a reduction in inflation by persistently and resolutely implementing our disinflation program.”
He reiterated that reducing inflation to single digits “is the most crucial item on our agenda.” The decline in inflation will continue strongly in 2025, he added.
“The disinflation process takes time, and we aim to bring inflation down to single digits within the next 2-2.5 years.”
While progress has been made in stabilizing the Turkish lira and reducing market volatility, Şimşek highlighted persistent challenges, particularly in services inflation.
“There is significant rigidity in service inflation, and it is taking longer than anticipated to decrease,” he said.
Expectations down to 33-month low
Şimşek also said the private sector’s inflation expectations are still unrealistic.
“There is no reason to be pessimistic,” he noted.
Şimşek’s remarks came as a central bank report showed inflation expectations among Turkish households have dropped to their lowest levels since February 2022.
Households expect inflation 12 months from now to fall to 64.1%, marking a 3.1-point decline from October, the central bank said in its November sectoral inflation expectations report.
The decrease marks a continued trend, as household inflation expectations, which stood at 73.14% in August, have been falling steadily for three consecutive months.
The proportion of households expecting inflation to decline over the next 12 months fell by 2 points from the previous month, reaching 26.3%, the report showed.
Expectations of market participants declined by 0.2 points to 27.2%, while that of the real sector dropped 1.7 points to 47.8%, the bank said.
The gap between market participants’ and households’ inflation expectations dropped to 36.9 points in November, down from 39.8 points the previous month.
“Disinflation efforts are positively influencing inflation expectations across all groups,” said Şimşek.
Compared to the peak in May, 12-month forward inflation expectations have improved by 12 points among households, 8.2 points in the real sector and 6 points among market participants, the minister wrote on social media platform X.
“This improvement in expectations supports the easing of rigidities in inflation.”
