News Analysis: Inflation cools in Türkiye, spurring debate on rate cuts

by Burak Akinci
ANKARA, July 25 (Xinhua) — Türkiye’s economic turnaround is drawing back foreign investors and showing signs of recovery, but the timing of potential interest rate cuts is sparking debate. While some experts advocate for continued disinflation efforts, others see room for monetary easing.
Since last year’s elections, Türkiye has shifted towards conventional economic policies to combat inflation, which peaked at 75.4 percent in May. Annual inflation dropped to 71.6 percent in June, the first decline in eight months. The central bank forecasts a year-end rate of 38 percent.
The centerpiece of the disinflation program, launched last summer, was a significant policy rate hike from 8.5 percent to 50 percent. Some economists now believe Türkiye should hold off on rate cuts until inflation is under tighter control.
“Premature easing could reignite inflation, making things very difficult in the current climate,” said Istanbul-based economist Mustafa Sonmez. He expressed concern that households squeezed by inflation haven’t yet felt the full impact of disinflationary measures, and early cuts could further strain their finances.
The slowdown in inflation has raised expectations of an imminent central bank policy shift. Deutsche Bank, for instance, predicts two 250 basis point cuts in November and December.
Small and medium-sized businesses, facing dramatically increased borrowing costs since last year, also favor a relaxation of monetary policy.
However, the central bank appears hesitant to cut rates this year, prioritizing a significant decline in inflation before making such a move. The bank’s governor, Fatih Karahan, reiterated the bank’s commitment to fighting inflation and maintaining its tight monetary stance in a recent interview with Reuters. The bank left its benchmark rate unchanged for the fourth consecutive month at its July meeting.
“Recent data confirms a slowdown in domestic demand, albeit still inflationary,” the bank stated.
Ankara-based finance professor Senol Babuscu believes it’s too early to guarantee sustained disinflation throughout the year, despite June’s faster-than-expected decline. He argues that a potential August rate cut would be a “mistake.”
The central bank will release updated inflation projections in August and may revise its year-end target upwards. A recent survey by the bank revealed market participants now expect inflation to fall to 42.9 percent by year-end, down from a previous estimate of 43.5 percent.
Turkish Finance Minister Mehmet Simsek anticipates a temporary rise in July inflation due to factors like public pension hikes for inflation-hit retirees. He remains confident that the disinflation process will gain traction in the coming months.
Improved economic indicators are attracting foreign inflows. High interest rates have made Turkish assets appealing to investors and hedge funds, leading to billions of dollars in bond purchases this year, bolstering the central bank’s reserves.
Furthermore, Moody’s Ratings upgraded Türkiye’s credit rating for the first time in over a decade, a positive sign for the country’s economic program. The rating was raised two notches to B1 from B3, with a positive outlook. ■