Turkish Inflation Slows More Than Expected in December

In a surprising turn of events, Turkish inflation slowed more than expected in December, signaling a potential shift in the country's economic trajectory. The consumer price index (CPI) rose by 47.09% year-on-year, marking a significant decline from the previous month's 49.6% increase. This unexpected slowdown has raised hopes that the government's efforts to stabilize the economy and control inflation may be bearing fruit.



The Central Bank of the Republic of Turkey (CBRT) has been at the forefront of the battle against inflation, implementing aggressive monetary tightening policies throughout the year. In March, the CBRT raised the policy rate to 50% from 8.5% in mid-2023, aiming to stabilize the economy and curb inflation. However, as inflationary pressures eased, the CBRT announced a policy rate cut in late December, trimming the rate from 50% to 47.5%. This decision signaled a cautious move to support economic growth while maintaining price stability.

The government's fiscal policies have also played a significant role in the inflation slowdown. In particular, the 30% minimum wage hike for 2025 aimed to balance the needs of workers with the broader economic effort to keep inflation under control. By increasing the minimum wage, the government sought to protect households from the lingering effects of high prices, thereby mitigating the impact of inflation on the purchasing power of citizens.

The improvement in international reserves and the reduction in the current account deficit have also contributed to the unexpected inflation slowdown. In 2024, Türkiye saw a significant improvement in its international reserves, which hit a record level of $159.4 billion as of Dec. 6. This increase in reserves provided a buffer against external shocks and reduced the country's vulnerability to currency fluctuations. Additionally, the current account deficit decreased to $45.4 billion in 2024, showing some improvement compared to previous years. A smaller current account deficit means that the country is importing fewer goods and services than it is exporting, which helps to reduce inflationary pressures.

The CBRT's policy rate cut is expected to have an impact on consumer spending and business investment in the near term. Lower borrowing costs for businesses may encourage them to invest in new projects or expand existing operations, leading to an increase in business investment. Similarly, the rate cut may boost consumer spending by making it cheaper for households to borrow, increasing consumer purchasing power. This could lead to an increase in consumer spending, which accounts for a significant portion of economic activity.

However, the CBRT's policy rate cut also carries potential risks and benefits for the Turkish economy's long-term stability and growth. On the one hand, a lower policy rate can stimulate economic growth by encouraging businesses to invest and consumers to spend. This can help boost economic activity and job creation, which has been a challenge with the unemployment rate rising to 8.8% in October 2024. On the other hand, a policy rate cut could reignite inflationary pressures, making it difficult for the CBRT to maintain price stability. High inflation expectations and strong inertia still uphold upside risks on the inflation outlook.

In conclusion, the unexpected slowdown in Turkish inflation in December signals a potential shift in the country's economic trajectory. The CBRT's policy rate cut, combined with the government's commitment to structural reforms, has raised hopes that the economy may be stabilizing. However, the CBRT will need to carefully monitor inflationary pressures and adjust its policy accordingly to ensure the long-term stability and growth of the Turkish economy.