Policy consistency should support lower inflation, build reserves: Fitch

improvement in policy consistency should support lower inflation, a narrower current account deficit and a recovery in international reserves, which could be positive for Turkiye’s sovereign rating, credit rating agency Fitch Ratings said recently in its latest assessment on Türkiye’s economic outlook.

In a statement, issued on April 26, Fitch said that an “expected post-election fiscal tightening would strengthen the effectiveness of Türkiye’s monetary policy, in the context of weakened transmission channels.”

“If sustained, this improvement in policy consistency should support lower inflation, a narrower current account deficit and a recovery in international reserves.”

The agency mentioned that preelection public spending contributed to the growth of the budget deficit, with the central government budget deficit in the first quarter estimated to have reached 5.2% of gross domestic product (GDP).

Fitch also forecast that the noninterest deficit would be 2.6% of GDP, highlighting that fiscal policy contributed to resilient domestic demand in the first quarter.

“We believe the government will reduce the fiscal deficit in the rest of 2024 by slowing spending growth, especially that which is not related to earthquake reconstruction,” it added, referring to the massive earthquakes that struck southeastern Türkiye in February last year causing pressure on the deficit and spending to boost the recovery of the region.

“Inflationary pressures have eased (month-over-month inflation dropped to 3.2% in March from 6% in January) and we forecast annual inflation to decline to 40% by end-2024 from 68.5% in March,” it added.

Türkiye walked away from prior monetary policy, delivering an aggressive tightening following last year’s election in a bid to rein in inflation, lifting its key policy rate to 50% as of March.

The bank held its benchmark oneweek repo rate steady in its last meeting on Thursday but left the door open to additional hikes “in case a significant and persistent deterioration in inflation is foreseen.”

The policy pivot after last year’s elections seeks to rebuild foreign exchange reserves and reduce chronic current account and budget deficits to surpluses.

Treasury and Finance Minister Mehmet Şimşek hinted recently that strong measures meant to enhance public savings will come into force in the second half of the year, indicating that the related studies have reached their final stages.

Turkish economic officials have conveyed they expect inflation to start a sustained drop in the second half of the year.