Turkey: Challenging times ahead to be tackled with policy determination – BBVA

According to the Research Department at BBVA, the change in economic policy direction in Turkey and the ease of geopolitical tension with the US triggered the stabilization and recovery of Turkish financial assets. They consider that monetary policy should be maintained tight to fight inflation and re-anchor inflation expectations.  

Key Quotes:  

“The global expansion remains at a steady pace, but more moderated and less synchronized. Risks now cumulate on protectionism, normalization of the Fed, tensions in emerging countries, greater uncertainty in Europe.”

“Turkey’s firm policy response to the financial shocks helped to restore confidence in financial assets. The economic adjustment is now underway.”

“Recent financial shocks and necessary tightening policies to restore confidence will result in a faster rebalancing of the economy. We expect GDP growth to decelerate to 3% in 2018 and 1% in 2019″.

“The sharp depreciation of the exchange rate during the summer triggered excessive inflation pressures. We estimate the year-end inflation to remain high and start to moderate from 2Q19 onwards. Both monetary and fiscal policies included in the New Economic Program (NEP) are now more adequate to restore confidence and rebalance the economy.”

“The Central Bank (CBRT) surprised on the upside and hiked its policy interest rate (one-week repo) by 625bps to 24.0% in September. The recent stabilization in the currency and voluntary discount campaigns could have provided buffer for the CBRT not to react in October. Monetary policy should remain alert as inflation expectations are far from anchored.”