IMF welcomes Turkey’s work on inflation, but wants more progress

• IMF: ‘Prudent income policies’
• External shocks could dent efforts
• Diverging forecasts for inflation

The International Monetary Fund has praised Turkey’s efforts to bring down inflation while maintaining economic growth, but called for more to be done to consolidate gains and lower subsidies, particularly for electricity.  

The government’s disinflation policy has borne success “on the back of strong fiscal consolidation, prudent income policies and a tight monetary policy stance”, the fund said in its latest Article IV report, released on February 13. 

The IMF predicts strong growth in Turkey’s economy in the next few years, averaging about 4 percent annually up to 2031. This is underpinned by rising confidence and a steady reduction in borrowing costs, it said.

Turkey has been pursuing tough fiscal and monetary policies under central bank governor Fatih Karahan and finance minister Mehmet Şimşek, which have led to interest rates remaining well over 30 percent to suppress persistent inflation.

Last month the central bank cut its main lending rate by 1 percentage point to 37 percent, a smaller reduction than expected.

Fitch Ratings has raised Turkey’s outlook to positive while maintaining its long-term credit rating at BB-, short of investment grade. Moody’s maintained its Ba3 score, three rungs below investment grade, and a stable outlook.

Although Turkey has made progress in bringing down inflation, the IMF suggested it may struggle to hit its targets. 

Earlier this month, the central bank forecast year-end inflation of 16 percent for 2026. It predicts the consumer price index will ease to 9 percent in 2027 and remain in the single digits thereafter. 

By contrast, the IMF expects Turkish consumer inflation to end the year at 23 percent. It is predicting a drop to 19 percent in 2027 and to 15 percent until 2031. 

The fund also cautioned that Turkey’s disinflation programme was exposed to external shocks, such as increases in energy costs and extreme weather events. 

One such event may have struck at the same time as the IMF report was released. Massive flooding in a number of southwestern provinces in mid-February, reported in Türkiye Today, is having an impact on greenhouse food and early spring seasonal crops, potentially putting upward pressure on food prices. 

The IMF report also pointed to downside risks over employment and industrial output, according to Hikmet Baydar, an economist with 3 Göz Consultancy. The jobless rate is set to rise to 9 percent by 2028, up from 8 percent last year.

Baydar said higher unemployment could signal that deflationary policies were leading to a slowdown in production.

“The current year-on-year contraction in industrial production suggests that there is little light at the end of the tunnel in the near term, even from the IMF’s perspective,” he said. 

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The IMF also said Turkey should keep curbing subsidies, particularly for electricity, and implement “a tighter macroeconomic policy mix combined with ambitious structural reforms to entrench disinflation, further strengthen external buffers, and support inclusive medium-term growth”.

While the central bank should maintain its tight monetary policy stance, Hande Şekerci, chief economist with İş Portföy, said there could be some space for easing of austerity measures.

She pointed to a recent decline in the government’s budget deficit to below 3 percent of GDP, coupled with a continued gradual reduction of interest rates in line with the inflation outlook.

This “could create more room for fiscal policy to provide further support to disinflation”, Şekerci told AGBI.