Is Türkiye Approaching Interest Rate Cuts Amid Ongoing Disinflation?

Is Türkiye Approaching Interest Rate Cuts Amid Ongoing Disinflation?

ANKARA, Oct. 3 (Xinhua) – Türkiye's strict monetary policies have positively impacted the nation's economic landscape, leading to a notable decline in inflation rates as of September. This shift has sparked increasing discussions among analysts regarding potential interest rate cuts.

According to official data released on Thursday, Türkiye's annual inflation rate dropped to 49.38 percent in September, down from 52 percent in August. However, the monthly inflation rate saw an unexpected rise of nearly 3 percent.

On September 5, the Turkish government adjusted its year-end inflation forecast for 2024 to 41.5 percent, a significant increase from the 33 percent projected at the start of the year.

Typically, inflation in Türkiye tends to decrease during the summer months due to lower energy consumption and a boost in tourism, which brings in foreign currency.

In the summer of 2023, President Recep Tayyip Erdogan initiated a comprehensive economic overhaul after the country experienced an alarming annual inflation rate of 85.5 percent in late 2022.

To combat this rampant inflation, the central bank has progressively raised its benchmark interest rate from 8.5 percent to 50 percent. However, the central bank has maintained its policy rate without changes for the past six months since March. This stability has prompted exporters and industrialists to advocate for a reduction in rates to stimulate economic growth.

The central bank's next rate decision is set for October 17, with many observers predicting that the monetary policy will remain unchanged. Nevertheless, analysts are optimistic about the possibility of an easing cycle commencing as early as November or December.

Independent economist Arda Tunca stated, "For the central bank to contemplate an interest rate cut, the official inflation rate must slow down to 45 percent." Market expectations indicate that interest rate cuts could materialize by the end of the year, with a potential reduction in November.

Tunca emphasized the need for fiscal policy to align with monetary policy to support this easing cycle. "Currently, there is insufficient support from fiscal policy, which poses a challenge," he noted.

High interest rates have created barriers for companies seeking loans, and Tunca remarked, "It is crucial to implement interest rate cuts to prevent inflation from becoming a supply-side issue."

On September 5, the Turkish government also revised its economic projections, increasing consumer inflation forecasts for the current year and the subsequent years compared to earlier estimates.

The GDP growth expectations for Türkiye in 2024 have been adjusted to 3.5 percent, down from the previously projected 4 percent. This adjustment suggests a further slowdown in economic activity, considering the 4 percent growth rate recorded in the first half of the year.

Economist Atilla Yesilada from Istanbul expressed concerns that inflation remains excessively high for policymakers to consider a rate cut this year. "Price growth continues to be robust, as indicated by the September figures, surpassing targets, while household expectations regarding the economy remain pessimistic," Yesilada stated.

Conversely, the government remains optimistic about the ongoing decline in inflation. Treasury and Finance Minister Mehmet Simsek, who is behind the disinflation strategies, stated on his X account after the inflation data release that "the disinflation process initiated in June is ongoing."

Simsek added, "This phase will be followed by a stabilization period, during which we aim to achieve a permanent reduction in inflation and reach single-digit figures."

International banking institutions also foresee the first interest rate cut occurring by the end of this year. ING Bank noted in a recent investor update, "We continue to see potential for the central bank to implement cuts in November or December, contingent on the data."

The bank further indicated that the relatively stable Turkish currency and a normalization in domestic demand should facilitate a decline in the underlying inflation trend for the remainder of the year.

The Turkish lira has faced significant depreciation in recent years, falling from 3.8 to the U.S. dollar in 2018 to 34.2 in October 2024. This decline has severely impacted the purchasing power of households in the import-dependent nation.

Despite governmental efforts to curb inflation, analysts believe it may take several years for families to stabilize their financial situations. In Ankara's Yildizevler neighborhood, Cagdas Yurt, a supervisor of a large residential building, remarked that while annual inflation has decreased significantly, it will take time for individuals to feel financial relief. "Let's hope that 2025 will be better than this year," Yurt expressed.