Economy in Turkey: Why the 2025 Inflation Target Won’t Be Achieved

December 25, 2024 BTT

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Inflation Forecasts for 2025 Amid Current Economic Trends

The Turkish economy faces a challenging outlook as we move into 2025. The recent developments over the last eight months have raised questions about the feasibility of meeting the inflation target of 21% for the upcoming year, as set by the Central Bank.

Recent Trends: The Current Economic Situation

The Turkish economy has experienced a significant increase in inflation during the past year. As of the end of 2024, inflation is expected to be around 46%, driven by a 7.9% increase in the dollar exchange rate and a meager 0.4% rise in fuel prices (motor oil and gasoline). Despite this, the consumer price index (CPI) has risen by approximately 23% during the last eight months, underlining a significant mismatch between wage and price increases.

Key figures from the past eight months show that despite an approximately 7.9% increase in the dollar exchange rate, the inflation rate has been far higher at 23%. Additionally, fuel prices, a significant factor in inflation, have seen minimal increases—only 0.4%—yet inflation remains high, highlighting the broader issues at play.

The Challenge of Meeting the Inflation Target

For 2025, the inflation target set by the Central Bank is 21%. However, with the economic environment showing limited control over some key factors like the exchange rate and fuel prices, many experts are questioning how feasible it is to meet this target.

Key concerns include:

Exchange Rate: While the exchange rate increase has been kept relatively low this year due to factors like heavy foreign currency inflow, it’s unclear whether such conditions will persist in 2025, especially without the support of high interest rates.
Fuel Prices: While fuel prices have been stable recently, many are skeptical about whether this can continue in 2025, particularly as global oil prices and currency fluctuations could affect prices.
Interest Rates: The policy rate has been at 50% for most of 2024, effectively curbing inflation. However, as rates are expected to be lowered in 2025, there may be increased demand and inflationary pressure, making it harder to control price increases.

A Difficult Path to 21% Inflation

Considering that Turkey has never reduced inflation by more than half of the previous year’s rate, achieving a drop from an expected 46% in 2024 to 21% in 2025 seems highly unlikely. Economic history suggests that bringing inflation below 30% in 2025 would already be a considerable achievement.

Likely Inflation Scenarios for 2025

Based on current economic conditions, the inflation rate for 2025 could be as follows:

Below 25%: This would be highly difficult and unlikely under the current circumstances.
25-30%: This would represent a major success for the government.
30-35%: This is the most plausible scenario, given the economic context.
35-40%: This is also a possible outcome if unfavorable internal or external factors come into play.
Above 40%: If there are significant negative external shocks or internal political issues, inflation could remain above 40%.

Overall, while there is a target of 21% inflation for 2025, it seems extremely challenging to achieve given the current economic conditions and the expected changes in monetary policy. The best-case scenario for inflation in 2025 would likely be between 25% and 35%.