Reuters poll- Turkish inflation to remain stubbornly high in coming year

Ashrith D
Published on: 7th November 2014
Turkey's inflation rate is expected to edge higher and finish the year at 9 percent, while economic growth will probably languish alongside that of the euro zone, a Reuters poll showed.

Once a favoured business destination due to its proximity to Europe, Turkey's economic star has faded in recent years as political tension both in the country and in the wider region as well as high government borrowing and inflation drove investors away.

The survey of 23 economists showed inflation is expected to remain stubbornly above the central bank's target of 5 percent over the next two years, slowing to 7.3 percent in 2015 and 6.8 percent in 2016.

The latest predictions are up sharply from the previous survey and are well above government forecasts, and come despite a huge central bank rate hike in January.
Reuters poll- Turkish inflation to remain stubbornly high in coming year, economy
They also run counter to a general global trend of falling inflation rates. ECILT/WRAP

Turkey's central bank hiked its policy lending rate in January by over 400 basis points to 12 percent to support a tumbling lira as emerging market currencies took a broad hit.

The lira has stabilised since but the rate hike along with weak demand from the euro zone, its main trading partner, has taken its toll.

"(The rate hike and) other macroprudential measures to reduce excessive credit growth amongst households has suppressed domestic demand, the major source of growth in Turkey," said Piotr Matys, economist at Rabobank.

Turkey's economy now is expected to grow 3.5 percent next year, slower than earlier thought, and 4 percent in 2016, according to the poll.

Bora Tamer Yilmaz, economist at brokerage Ziraat Yatirim, said "there will be some effects" from the euro zone slowdown, adding: "We estimate that Turkish growth is more sensitive to German exports and euro-area investments."

The euro zone economy is predicted to grow an average 0.8 percent in 2014 and 1.2 percent in 2015, according to a separate Reuters poll. ECILT/EU

The central bank cut its lending rate in August but is now expected to keep it at 11.25 percent through next year. Economists saw no change in the one-week repo rate, currently at 8.25 percent, through next year as well.

In the meantime, Turkish government officials have warned that tensions in neighbouring Iraq and Syria, as well as Ukraine, combined with slower growth in Europe could hold back economic growth.

Turkey also is especially sensitive to changes in global liquidity because of its large current account deficit which was easier to finance during the years of cheap U.S. funding.

The poll suggested Turkey's current account deficit, cited as one trigger for sudden capital outflows earlier this year, would narrow to $47 billion this year before widening again to $50.4 billion in 2015 and $54.1 billion in 2016.
The government aims to reduce the current account deficit to 5.2 percent of gross domestic product by 2017 from 5.2 percent estimate this year.
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