Growth set to pick up soon
The Turkish central bank is seeking to avoid excessive volatility in domestic credit and exchange rates caused by capital flows, while at the same time reducing inflation to 5%. In January and February, the bank lowered its interest rate corridor slightly to help limit capital inflows. But it raised banks’ reserve requirements to prevent lending growth from rising too rapidly.
So far, the bank seems to have got the balance right. However, assessing the correct stance may become difficult as the economy picks up speed, and interest rates in the US and the Eurozone stay near zero – encouraging capital flows to the emergers.
The latest data and surveys are still patchy and contradictory. But actual lending rates to firms and households have fallen significantly since the middle of 2012, and this should spur both consumer spending and investment. Meanwhile, lower inflation this year and healthy employment growth will also support consumer spending, and the lessening in global tensions will help to drive a turnaround in investment – although some of the rise in demand will leak out into higher imports. We now expect GDP growth of 3.5% this year, following the 2.2% recorded in 2012.
Provided inflation and the current account deficit are kept in check and the global background remains reasonable, annual GDP growth should exceed 5% in the medium term.
Monthly trade balance
Source: Turkish Statistical Institute; Haver Analytics
Interest rates
Source: Oxford Economics; Central Bank of Turkey; Haver Analytics
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