Türkiye | How far can the policy mix go for targeted disinflation?

Summary

The sensitivity on growth and employment might continue to shape the policy mix with a trade-off of a slower disinflation path. We expect the Medium Term Program (MTP), to be revised in early September, to have more color on the political preferences on near term growth outlook.

Key points

• Key points:
• The Central Bank (CBRT) has revised its framework for medium-term forecast communication, introducing interim targets for year-end: 24%, 16%, and 9%, for 2025, 2026, and 2027, respectively, to be kept unless there are exceptional circumstances.
• The effort to highlight a simple reference point for both economic agents and administered prices sounds positive to reduce the impact from backward indexation. Not changing the targets by means of frequent revisions in the forecasts will also help credibility. In this respect, actions will be essential to see how accountable and proactive the CBRT could be if inflation projections and readings remain far from the targeted levels.
• On the monetary stance, the revised communication and the inflation targets of the CBRT signal a tighter than expected policy mix, yet with inconsistencies on their growth projections, which lead us to think about a potentially stronger reliance going ahead on macro-prudential measures during the already started rate cuts.
• On the fiscal side, after realizing a limited expansion in 1Q25, primary deficit shrank by 1.2pp to 1.1% of GDP between March and July. Nevertheless, given the increasing challenges to reduce spending beyond earthquake areas to reach the MTP primary balance target of 0% for 2025 and the latest attempts on additional quasi-fiscal policies, we suspect that the fiscal policy might still remain supportive but to a lower extent.
• We expect 3.5% and 4.0% GDP growth for 2025 and 2026, which can surprise the next-year’s end of the year inflation consensus expectation of 20% on the upside after achieving around 30% inflation at the end of this year.

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