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In a report to clients, Goldman Sachs’ Economists Kevin Daly and Clemens Grafe believed that the Turkish economy may see a shallower recession while calling for higher interest rates.

Key quotes

“As the ability of Turkey’s central bank to intervene in the market declines in tandem with its foreign currency reserves, we think that monetary policy will need to tighten to slow the pace of imports, encourage inflows and discourage dollarization.” 

“Gross domestic product will shrink 3.5% in 2020, a revision of its earlier forecast for a 5% decline. As a result of a “more limited contraction,” the economists expect the current-account deficit at 4% of GDP in 2020.

“Turkey’s policy rate could end the year at 12% and reach 14% by the end of the first half in 2021.”

“The main risk to this view is that the authorities tighten policy too little, too late as they prefer to remain supportive of growth, a policy course which would add to the risks around the lira.”