International credit rating agency Fitch has evaluated that with the new economic management taking office in Turkey, the policy rate could become a tool used by policymakers to alleviate pressures on the lira and reserves and combat inflation.
Credit rating agency Fitch has made evaluations about the Turkish economy. According to the report, following the election, the government has signaled a policy change in the economy. However, the report mentions that there are complex challenges ahead for policymakers, such as the withdrawal of regulatory steps, and therefore it will take time to understand the impact of any policy changes.
The statement mentions that “the policy rate can become a tool for policymakers to alleviate pressures on the lira and reserves and to combat inflation.”
It is highlighted that the recent 16% depreciation of the Turkish lira against the dollar could reduce the pressure on international reserves.
The note suggests that the recent depreciation of the Turkish lira could help alleviate pressure on reserves and contribute to reducing the current account deficit. However, considering the increased size and speed of pass-through in Turkey in recent years, a weak lira could exacerbate the existing inflationary pressures. Excessive volatility in the lira could also create concerns about bank deposit stability (as seen in December 2021). Nevertheless, the current capital flow management measures can continue to balance the pace of depreciation driven by local currency demand in the short term.