Expected post-election fiscal tightening would strengthen the effectiveness of Turkiye’s monetary policy in the context of weakened transmission channels, Fitch Ratings recently said.

This improvement in policy consistency, if sustained, should support lower inflation, a narrower current account deficit and a recovery in international reserves, it said.

Inflationary pressures have eased and Fitch forecasts annual inflation to decline to 40 per cent by the end of this year from 68.5 per cent in March.

Fitch believes the economic policy mix implemented since June 2023 will be maintained despite the opposition Republican People's Party (CHP) winning the largest share of the vote in the country’s local elections at the end of March.

Fitch, therefore, continues to expect a significant decline in inflation and easing of external vulnerabilities. Turkiye has demonstrated commitment to fighting inflation under the new policy mix.

To further reduce inflation, the authorities face a challenge in rebuilding the effectiveness of monetary policy.

Monetary policy transmission channels have weakened due to the prolonged period of artificially low interest rates, high financial dollarisation, distortionary regulatory measures introduced in 2022 and the first half of 2023, and high inflation and exchange-rate depreciation expectations, Fitch noted in a release.

Strengthening the consistency and coherence of the macro policy mix would help boost monetary policy effectiveness, Fitch feels.

On a four-quarter rolling basis, Fitch estimates that the central government budget deficit reached 5.2 per cent of gross domestic product (GDP) in the first quarter this year, with the primary deficit at 2.6 per cent.

Fitch believes the government will reduce the fiscal deficit in the rest of 2024 by slowing spending growth, especially that which is not related to earthquake reconstruction. The choice of revenue measures is likely to take into consideration their potential inflationary impact.

Fibre2Fashion News Desk (DS)

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