Türkiye to keep tightening fiscal policy to help trim inflation

Treasury and Finance Minister Mehmet Şimşek on Monday said the government would continue to help the central bank reduce inflation, while also highlighting Fitch’s upgrade of the country’s sovereign rating.

“Türkiye is committed to maintaining sound policies and implementing structural reforms, while attaining price stability remains its top priority,” Şimşek said in comments on social media platform X, formerly known as Twitter.

Annual inflation rose to 67% in February, above expectations and maintaining pressure on the Central Bank of the Republic of Türkiye (CBRT) for a tight monetary policy. Economists expect it to decline to around 40% by year-end.

“The CBRT is committed to anchoring inflation expectations using all the tools at its disposal. We will continue to tighten fiscal policy to help the CBRT reduce inflation,” Şimşek said.

The Turkish lira weakened further on Monday, hitting a fresh record low of 32.0075 against the U.S. dollar to bring its losses to nearly 8% this year.

Şimşek said the recent volatility in the foreign exchange market “should be viewed as temporary.”

Fitch raised Türkiye’s rating to “B+” from “B” on Friday, saying tighter approaches to monetary policy were helping combat inflationary trends.

It also upgraded Türkiye’s outlook to positive from stable. The agency had raised the country’s outlook from negative in early September.

The upgrade “reflects the strength of Türkiye’s sound economic policies,” Şimşek said.

After winning reelection last May, President Recep Tayyip Erdoğan installed a new economy administration led by Şimşek that abandoned years of easing policy in favor of tightening.

An aggressive eight-month policy-tightening cycle since June raised the central bank’s main interest rate by 3,650 basis points to 45%. The tightening aims to arrest inflation, curb chronic deficits, rebuild foreign exchange reserves, and stabilize the Turkish lira.

Last month, the Turkish central bank paused its tightening cycle, saying it was enough to ensure disinflation. Still, it said the policy could be tightened further “in case a significant and persistent deterioration in inflation outlook is anticipated.”

Fitch said the upgrade “reflects increased confidence in the durability and effectiveness” of policies implemented since the pivot after last year’s elections, including greater-than-expected frontloading of monetary policy, in reducing macroeconomic and external vulnerabilities.

This January, Türkiye’s outlook was lifted to positive from stable by Moody’s, which affirmed its B3 credit rating. S&P Global raised the country’s outlook from stable to positive in December, affirming its rating at B.

Achieving price stability ‘takes time’

Officials have repeatedly said inflation is envisaged to peak by the middle of the year and enter a steep downward trend as of the second half of 2024.

Some banks and economists have expressed a growing prospect of more policy steps to cool inflation after nationwide local elections on March 31, given the price pressure and strong domestic demand.

“It’s important to bear in mind that achieving price stability takes time,” Şimşek said.

“Post local elections this month, Türkiye will have a long period without elections to pursue the medium-term program, which also includes reforms that will boost productivity and enhance competitiveness,” he added.

Last month, the central bank maintained its 36% year-end inflation target and vowed to keep policy tight for longer to bring inflation down to the forecasted path.

Şimşek said Türkiye’s growth rebalancing was well underway, stressing that domestic consumption is moderating, and net exports are strengthening.

He added that the current account deficit is narrowing “more rapidly than anticipated,” and is on track to fall to well below 3% of gross domestic product (GDP) this year.

Among others, Şimşek said restoring fiscal health is also a “key objective.”

“The fiscal impulse is expected to recede later this year, and income policies should start becoming more supportive,” he stated.

“We are committed to reducing the fiscal deficit, including earthquake-related expenditures, to under 3% of GDP next year.”

Şimşek also said the share of Turkish lira deposits in total deposits has risen by 12 percentage points since August. “This trend will continue as confidence in our program grows,” he noted.

In sum, the minister noted that the medium-term program the government unveiled in September “is working as expected.”