Türkiye's Economic Outlook: Are Interest Rate Cuts on the Horizon as Disinflation Persists?

Türkiye's Economic Outlook: Are Interest Rate Cuts on the Horizon as Disinflation Persists?
ANKARA, Oct. 3 (Xinhua) -- Türkiye's stringent monetary policies have positively impacted the country's economic landscape, leading to a notable decrease in inflation rates as of September. Analysts are increasingly discussing the potential for interest rate cuts in light of these developments.

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

On September 5, the Turkish government adjusted its year-end inflation forecast for 2024, raising it to 41.5 percent from an earlier projection of 33 percent made at the start of the year.

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

In the summer of 2023, Turkish President Recep Tayyip Erdogan initiated a significant economic overhaul after the country faced an alarming annual inflation rate of 85.5 percent at the end of 2022.

To combat soaring inflation, the central bank has gradually raised its benchmark interest rate from 8.5 percent to 50 percent. Since March, the central bank has maintained its policy rate steady for six consecutive months. However, exporters and industrialists are urging policymakers to consider reducing rates to counteract the economic slowdown.

The central bank's next rate decision is scheduled for October 17, with many observers predicting that the monetary policy will remain unchanged for now. Nonetheless, analysts anticipate 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 decline to 45 percent." He noted that market expectations suggest a potential cut could occur in November, emphasizing the need for fiscal policies to support monetary strategies.

"Currently, there is insufficient support from fiscal policy, which poses a challenge," Tunca added. He also highlighted that high interest rates hinder companies' access to loans, stating, "It is crucial to implement interest rate cuts to prevent inflation from evolving into a supply-side issue."

On September 5, the Turkish government revised its economic projections, increasing consumer inflation forecasts for this year and the next compared to earlier estimates. The GDP growth expectations for 2024 have been adjusted to 3.5 percent, down from the previously projected 4 percent, indicating a further slowdown in the economy, which recorded a growth rate of 4 percent in the first half of the year.

Atilla Yesilada, an Istanbul-based economist, expressed concerns that inflation remains too elevated for policymakers to consider a rate cut this year. "Price growth remains robust, as evidenced by the September figures, exceeding targets, while households' economic outlook is grim," said Yesilada, who serves as a country advisor at Global Source Partners.

Conversely, the government remains optimistic about the continued decline in inflation. Treasury and Finance Minister Mehmet Simsek, the architect of disinflation policies, stated on his X account following the inflation data release that "the disinflation process that began in June is ongoing."

Simsek added, "This phase will be succeeded by a stabilization period, during which we will achieve a permanent decrease in inflation and reach single-digit levels."

Meanwhile, international banking institutions foresee the first interest rate cut occurring by the end of this year. ING Bank noted last week, "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 normalization in domestic demand should contribute to a decline in the underlying inflation trend for the remainder of the year.

The Turkish lira has faced significant depreciation in recent years, plummeting 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 this import-dependent nation.

Despite government efforts to curb inflation, analysts believe it may take families several years 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 significantly decreased, it will take time for people to feel financial relief.

"Let's hope that 2025 will bring better conditions than this year," Yurt expressed.