Disinflation: Türkiye’s Medium-Term Economic Program

Disinflation constitutes the most important element and target of Türkiye’s medium-term economic program that the government announced last week, Treasury and Finance Minister Mehmet Şimşek said Monday.

Consistent Domestic Consumption and Credit Growth

Şimşek said consistent domestic consumption and credit growth were needed to lower inflation to single digits, as is targeted in the country’s new economic road map for the next three years.

President Erdoğan’s Expectations

Separately, President Recep Tayyip Erdoğan acknowledged the upcoming difficulties and said he hoped to see a “very clear” drop in inflation in 12 months, given that “it will take some time” for economic policies to take effect.

Speaking with reporters en route home from a G-20 summit in India, Erdoğan said Türkiye must be patient as it seeks to lower inflation given the delayed effects of tightening monetary policy.

Importance of Patience and Investor Confidence

“We need to be a little patient,” he said.

The president believes that the new economic road map will strongly enhance investor confidence, saying that Türkiye will witness a strong inflow of funds soon.

Medium-Term Plan to Lower Inflation

The government’s new medium-term plan aims to lower inflation to single digits within three years.

The new forecasts show annual inflation rising to 65% by year-end before dipping to 33% next year, up from 24.9% and 13.8%, respectively, in year-earlier forecasts.

Inflation Projections and Historic Figures

It is expected to fall to 15.2% in 2026 before dipping further to 8.5% by the end of 2026.

The inflation surged to 58.94% over the 12 months ending in August. It had reached a 24-year high of 85.5% last October and stood at 47.83% this July after regressing to as low as 38.21% in June.

Importance of Inflation Reduction

Şimşek assured that policies would not allow inflation to erode the purchasing power of workers and retirees but stressed that reducing inflation is essential to boosting their income.

In an interview on broadcaster NTV on Monday, he also emphasized the importance of productivity growth and price stability in achieving economic growth. He called for the collective responsibility of employers, unions, and citizens in the fight against inflation.

Support for Tight Monetary Policy

In his strongest pledge of support for his new economic team’s policy overhaul after the May elections, Erdoğan last week said inflation would fall to single digits “with the support of tight monetary policy.”

Erdoğan stressed they would not sacrifice economic expansion or jobs as policies are adjusted.

After winning reelection, he named a new economic team, including Şimşek and Central Bank of the Republic of Türkiye (CBRT) Governor Hafize Gaye Erkan, who have launched aggressive interest rate hikes in a bid to tackle the country’s long-term inflation issue.

Under Erkan, the central bank has roughly tripled its benchmark policy rate to 25% and pledged that monetary tightening will gradually be strengthened as needed.

Analysts’ Expectations

Analysts believe the monetary authority will need to raise the key policy rate much higher at the next meeting on Sept. 21 because inflation has shot back up to nearly 60%.

The central bank has said inflation would likely rise to near 62% by year-end despite a more aggressive-than-expected 750-point rate hike in August.

Government’s Revenues and Budget Deficit

Şimşek, meanwhile, on Monday also said the government would seek further revenues outside the budget, including from privatization, and that quantitative tightening will be carried out if necessary.

He said authorities aimed to bring the budget deficit below 3% of the gross domestic product (GDP), excluding the impact of this year’s devastating earthquakes, adding that foreign funding would be an element of the economic program.

Global Investment Roadshow

Şimşek kicked off a global investment roadshow at the G-20 summit in New Delhi on Friday, mainly to discuss the government’s reforms.

He is set to travel to New York and European economic powerhouses Germany and Britain and cities in Asia and the Middle East to meet with dozens of top chief executives.