President Recep Tayyip Erdoğan on Friday expressed optimism about the future trajectory after inflation slowed down in July for the first time in eight months after a series of aggressive rate hikes, saying policies under the government’s economic program are “working.”

“We need a bit more patience. The decline in inflation has just begun and will continue to accelerate,” Erdoğan told reporters aboard a presidential plane on his return from a meeting of the Shanghai Cooperation Organization (SCO) in Astana.

Official data on Wendesday showed Türkiye’s annual inflation rate began what is expected to be a sustained fall in June, dipping more than expected to 71.6%. Monthly inflation also cooled markedly.

Erdoğan said the downward trend will continue with inflation expected to be in the low 60s in July and in the low 50s in August.

He reaffirmed that the government would not resort to populism and that the best thing to do for low-income earners, minimum wage workers, and retirees is to reduce inflation permanently to single digits.

The country’s central bank has held its benchmark policy rate steady over the last three months, vowing to act if the inflation outlook worsens, since raising rates by 500 basis points, or 5 percentage points, to 50% in March.

It has tightened by 4,150 basis points since June 2023, as authorities reversed yearslong loose policy after last year’s presidential and parliamentary elections.

Erdoğan said the government last year set a timeline for the transition to disinflation, also stressing “extraordinary conditions” after devastating earthquakes struck the country’s southeastern region and weighed heavily on the nation’s budget.

“Effective monetary policy takes time to show results, and additional fiscal efforts were necessary. Therefore, we projected that disinflation would begin after May 2024,” Erdoğan stated.

“Indeed, we observed a drop in annual inflation in June, and we anticipate that July will likely be in the low 60s. By August, we expect it to be in the low 50s. When the September inflation figures are announced, it will probably be just below 50,” said the president.

The Central Bank of the Republic of Türkiye (CBRT) expects disinflation to take hold in the second half of the year and forecasts an end-year rate of 38%, due to its tight policy stance.

Foreign financial institutions on Thursday went on to lower their year-end inflation expectations.

JPMorgan revised down its forecast to 42.5% from 43.5%, which is close to the 42.4% Morgan Stanley expects, compared to its earlier projection of 43.4%. Goldman Sachs sees inflation ending the year at 36%.

‘Extremely determined’

Fatih Karahan, CBRT governor, on Wednesday said the monetary authority is determined to combat soaring prices and will stick patiently to its tight policy stance.

“We will maintain tightness and wait for data and expectations to get in line with our disinflation path. We think we still have some way to go in this regard,” Karahan told an interview with Reuters late on Wednesday.

“We want to see a significant and sustained fall in the underlying trend of monthly inflation. We are extremely determined to bring down inflation,” Karahan said in the interview, his first with the media since becoming central bank chief in February.

Last month’s dip raised some expectations that the central bank would soon ease policy, with Goldman Sachs predicting a rate cut around September given building pressure on the lira.

But Karahan appeared to push back on this.

“We are seeing signs of demand rebalancing and its impact on prices. It is not healthy to draw conclusions from a single data point in this period of high volatility. We act with the determination and caution of a central bank,” he said on Wednesday.

QNB Finansbank said Karahan’s comments emphasised it was too early to perceive the June inflation dip as a trend change and aimed “to prevent expectations of an early interest rate cut.”

Since the start of the policy reversal, authorities have sought to cool demand, the main driver of inflation, and have been looking to flip current account and budget deficits, rebuild foreign exchange reserves and stabilize the Turkish lira.

High rates aim to make it more expensive to borrow money to buy goods or invest in new factory equipment. That relieves pressure on prices – but can also dampen growth.

That’s the tightrope the CBRT, just like other central banks, including the European Central Bank and the U.S. Federal Reserve (Fed), is trying to walk: make sure inflation is contained without pushing the economy into recession.

Program ‘is working’

Erdoğan on Friday acknowledged the persistent challenges, notably the cost of living.

“Our biggest problem is the cost of living. Inflation is the most unjust tax. Our greatest service to low-income and minimum wage earners, retirees is to permanently reduce inflation to single digits without resorting to populism, and to sustainably improve the standard of living” he asserted.

“Our program is working,” Erdoğan said, stressing that they “truly believe” in achieving the goals under the road map, which he said “may have seemed ambitious at first.”

Erdoğan also said Türkiye had faced a “significant” current account deficit problem last year, but said that has “largely been resolved” this year.

“As a percentage of our GDP, the deficit has decreased from around 6% to approximately 2%,” he said.

The president also cited the ground covered when it comes to foreign exchange reserves.

“Our total reserves are at about $145 billion, and our reserves, excluding swaps, have exceeded $10 billion. Since the March elections, our net reserves, excluding swaps, have improved by nearly $80 billion. This improvement is unprecedented and signals a strong sense of confidence. As a result, external balance is no longer a source of concern,” said Erdoğan.

“Our risk premium is decreasing, interest rates are falling, our credit rating is genuinely improving, the current account deficit is narrowing, and we are enhancing the balance in our budget.”

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