Can Turkey Escape Its Inflationary Nexus?

[The5ersTF]

The Pivot to Monetary Orthodoxy​

Turkey is making a critical pivot toward conventional monetary orthodoxy. This unwinds years of unconventional policy that caused high inflation and Lira volatility. The CBRT uses an aggressively tight monetary stance. The benchmark policy rate is 40.50%. This aims for a positive real rate against the 33.29% annual CPI. Stabilization is supported by ending the KKM deposit scheme. This removes a major contingent fiscal risk.

Structural Constraints and Import Dependency

Orthodox efforts face significant structural impediments. These complicate a rapid return to stability. Manufacturing relies heavily on imported inputs, averaging 25%. Lira depreciation (near 41.95 USD/TRY ) translates into cost-push inflation. This complicates disinflation efforts. This dependency fuels a chronic Current Account Deficit. It sustains a high external debt burden (45.1% of GDP ). Capital inflows are mandated to maintain external stability.

The Credibility Gap and Fiscal Imperative​

Program success hinges on policy endurance and effective fiscal support. The CBRT has limited room to maneuver. Reserves cover only 65% of short-term external debt. This vulnerability requires high policy rates. They must attract capital and defend the Lira. Policy commitment faces a credibility gap. Market 2025 inflation expectations (31.5% ) exceed the CBRT target (24% ). Sustained disinflation requires monetary resolve and fiscal consolidation. The substantial budget deficit (4.9% of GDP in 2024 ) must be curbed. This prevents public spending from undermining the central bank's tightening.