Türkiye Economic Outlook. February 2024

Summary

After increased concerns on inflation outlook and uncertainty ahead of the local election, there has been additional stress on the Turkish financial markets most recently. We expect more restrictive policies going forward, which will keep the current stabilization program on course.

Key points

• Key points:
• Rebalancing in the Turkish economy continues slowly. We keep our baseline assumption as a soft landing (3.5% GDP growth forecast for 2024).
• Consumption has most recently started to gain pace, which requires tighter financial conditions to help rebalance the economy and start anchoring inflation expectations.
• The CBRT stopped at 45% policy rate and signaled to continue tightening via macroprudential measures and quantitative tools. We maintain our call of 45% policy rate throughout 2024 but we assess the likelihood of hiking the rate above 45% has increased.
• Given the strong inflation realizations in Jan and Feb, we expect tighter financial conditions to be pursued in post-election period and keep our 2024 year-end inflation expectation of 45%.
• Led by our assumption of more restrictive policies, we reduce our budget deficit and current deficit forecasts to -5.2% and -2% of GDP for 2024 end, respectively (vs. -6.5% and -3.2%, previously).

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