Turkey keeps inflation outlook unchanged amid tightening of monetary policy

Inflation projected at 38 per cent by the end of the year and 14 per cent in 2025, according to country's central bank governor

A busy shopping street in Istanbul. Turkey has been increasing interest rates since last year to rein in inflation. AP

Turkey’s central bank has left inflation forecasts for this year and next year unchanged and has vowed to maintain a tight monetary policy.

Inflation is projected at 38 per cent by the end of the year and 14 per cent in 2025, its governor Fatih Karahan said during a briefing on Thursday. It is expected to fall to 9 per cent by the end of 2026.

Inflation has eased considerably in the last few months from a peak of 75 per cent in May to 61.8 per cent in July amid interest rate hikes by the central bank.

“As annual inflation had peaked in May, we entered the disinflation period … inflation will decline significantly in the third quarter,” Mr Karahan said.

The bank will “decisively maintain our tight monetary policy stance until price stability is achieved”, he added.

Turkey has been raising interest rates since last year to bring down inflation after it abandoned President Recep Tayyip Erdogan’s unorthodox policy of keeping interest rates low to spur growth.

“Price stability is a prerequisite for sustainable growth and improvement in social work welfare,” said Mr Karahan.

“As we [began] the process of disinflation in June, we will continue to do whatever is necessary to bring inflation down in line with our intermediate targets.”

Rating agencies upgraded Turkey’s credit ratings as the country focused on tightening its monetary policy.

Last month, Moody's Investors Service upgraded Turkey’s sovereign credit rating, the first such rating action in more than a decade, citing improvements in governance and economic policies.

“As the credibility and effectiveness of monetary policy rises, macroeconomic stability and strengthened institutions may allow Turkey's underlying credit strengths … reduce the risk of long-lasting inflation shocks in the future,” Moody’s said as it upgraded the country's sovereign credit rating to “B1" from “B3”, with a positive outlook.

Moody's cautioned, however, that external vulnerability risks remain “significant” for Turkey.

It noted that with the next parliamentary and presidential elections in 2028, this gives Ankara time to bring inflation down to previous low levels, “even at the cost of temporarily low economic growth”.

It also expected authorities to maintain the tight economic policy stance for some time, to “ensure that inflation expectations converge to the central bank's target on a sustained basis”.

In March, Fitch Ratings also upgraded Turkey’s credit rating on stronger fiscal policies and reduced financial risks.

The country is also taking new measures to support economic growth.

Last month, it has unveiled a $30 billion economic incentives package aimed at boosting investment in its advanced technology sectors. As part of the initiative, it aims to attract $20 billion in private sector investment.

Turkey also signed a Comprehensive Economic Partnership Agreement with the UAE, which is expected to boost bilateral non-oil trade to more than $40 billion in the next five years, from about $19 billion last year.

The country is also holding talks to sign a free trade agreement with the six-member GCC bloc.

Another positive development for Turkey is its removal from the Financial Action Task Force “grey list” of countries that face tighter monitoring for money laundering and terrorism financing, as the country makes progress in its fight against illicit actions in the sector.