News Analysis: Continuous tight monetary policy urged to cement disinflation results in Türkiye

By Xinhua Published: Sep 17, 2024 03:20 PM

People shop at a local market in Ankara, Türkiye, on Sept. 16, 2024. Easing monetary policy right now is premature as it may hinder disinflation efforts that have yielded successful results in Türkiye, said analysts as Türkiye's central bank is expected to announce the next rate decision this Thursday. (Photo: Xinhua)

Easing monetary policy right now is premature as it may hinder disinflation efforts that have yielded successful results in Türkiye, said analysts as Türkiye's central bank is expected to announce the next rate decision this Thursday.

Türkiye has been struggling with rising inflation and one of the worst cost-of-living crises of its history. Since June 2023, the central bank has raised its key interest rate from 8.5 percent to 50 percent, tightening monetary policy.

The country's annual inflation rate moderated to 51.97 percent in August, marking its lowest yearly level. The figure, released by official data in early September, came in slightly below market expectations.

"Annual inflation is expected to drop below 50 percent in September," Turkish Treasury and Finance Minister Mehmet Simsek said Friday.

In July, Moody's Ratings upgraded Ankara's sovereign credit rating, the first of its kind in over a decade, citing improvements in governance and economic policies. S&P Global Ratings also lifted Türkiye's rating.

Fitch Ratings upgraded Türkiye's rating last week, the second upgrade this year, citing successful disinflation efforts and policies to narrow the current account deficit.

Türkiye needs to maintain a tight monetary policy to improve inflation expectations even after a potential easing cycle, Arispe Morales, senior director at Fitch Ratings, told the semi-official Anadolu Agency following the upgrade.

Although the Turkish central bank has indicated that it does not favor a rate cut this year, a deepening cost-of-living crisis in the country out of tight monetary policies coupled with austerity measures might put the bank under great pressure to start easing in the short term, noted Atilla Yesilada, country advisor at business management consultancy Global Source Partners.

However, Yesilada stressed that "authorities have to maintain the tight policy for some time to obtain further concrete results in the fight against inflation."

An early rate cut could worsen inflation as it is cooling and fueling a run for hard currencies, Yesilada told Xinhua.

Türkiye's economic growth slowed to 2.5 percent in the second quarter from 5.3 percent in the first quarter this year, according to official data released last week.

Meanwhile, recent data from the Union of Chambers and Commodity Exchanges of Türkiye showed that 15,000 companies in the country have closed so far in 2024, up 28 percent from last year.

"Inflation has proven to be stubborn, and as a result, there will be consequences in terms of employment and growth," noted Istanbul-based economist Mustafa Sonmez.

Still, the government has no other option but to continue with tight monetary and fiscal policies to control inflation for the foreseeable future, Sonmez said, adding that domestic demand needs to weaken further, and so policy will need to be kept tight for a longer time.

"Even though year-on-year inflation has dropped significantly compared to last year, Turkish inflation is still high, in fact, one of the highest in the world," said Sonmez.

In early September, the Turkish government raised its expected inflation rate for 2024 from 33 percent to 41.5 percent.

More financial difficulties await low and middle-income households in 2025 due to the ongoing implementation of austerity measures, said Sonmez.