Expect around 37% drop in Türkiye's inflation by 2025 — IMF

Inflation in Türkiye is expected to fall to around 24 percent next year, according to a report released by the International Monetary Fund (IMF).

"In the medium term, a further drop in inflation would boost confidence, and growth would rise back toward potential of 3.5-4 percent," the IMF said in its 2024 Article IV Mission on Wednesday.

The financial agency said headline inflation in Türkiye has started easing this summer, but it still remains high, adding, "Despite favourable base effects, still-strong inertia would keep inflation at around 43 per cent at end-December."

The IMF said a tighter policy mix that is focused on fiscal policy would reduce risks and bring inflation down more quickly and sustainably.

It added that a larger and more front-loaded fiscal consolidation is needed to help reduce inflation.

The agency said tight financial conditions will be needed until inflation is firmly on a downward path and inflation expectations converge to the central bank's forecast range.

Türkiye's annual inflation rate was at 61.78 percent in July, slowing from 71.60 percent in June, and down from 75.45 percent in May.

'Shock absorber'

The IMF said the Central Bank of the Republic of Tükiye "should continue smoothing temporary exchange rate volatility while avoiding undue real appreciation, and replenish reserves buffers opportunistically" until sequential inflation is on a sustainable downward trend.

"As inflation falls and reserve buffers improve, intervention can be scaled back, and allow the exchange rate to act as a shock absorber," it added.

It advised that intervening against persistent shocks should be avoided.

The financial agency said tight monetary and income policies are expected to weigh on domestic demand, bringing economic growth to around 3 percent this year.

Türkiye's current account deficit, meanwhile, declined to 2.7 percent of GDP in the first quarter of this year, and it is estimated to fall to around 2.2 percent of GDP next year.

While Türkiye's international reserves, net of swaps and other liabilities, increased by $91 billion since April, international credit agencies upgraded the country's sovereign risk rating, and CDS spreads have declined nearly 440 basis points since mid-2023, it added.

The IMF said Türkiye's removal from the Financial Action Task Force "Gray list" in June was welcomed.

The agency added that strengthening policy frameworks, addressing barriers to small and medium Enterprises, and improving labour market functioning would boost economic growth in the medium term.