| 19 June 2024, Wednesday |

Turkey to downgrade economic view on path to policy orthodoxy

In an effort to pursue a more conventional and practical course of action, Turkey is anticipated to lower its economic growth projections and increase its inflation projections on Wednesday. Analysts believe this move may put President Tayyip Erdogan’s patience to the test.

An annual “medium-term programme” that Erdogan and other top economic officials will release is considered as a turning point in a larger policy U-turn that started in June. It will include fresh estimates for growth, inflation, unemployment, the current account, and other variables.

After his May re-election, Erdogan – faced with deep economic strains and badly depleted forex reserves – named a new cabinet and central bank chief to undertake aggressive interest rate hikes and begin freeing up credit and forex markets.

The lira has since shed 25% to the dollar and annual inflation jumped to near 59% last month.

The economy is expected to slow through year-end – and ahead of nationwide municipal elections set for March next year – as stimulus tied to the May elections fades and as the policy rate hikes, to 25% from 8.5%, start to weigh.

A Reuters poll last month showed expectations of 2.9% full-year growth, lower than trend in the emerging market economy that seeks to reverse a years-long exodus of foreign investors.

With Erdogan’s ruling AK Party seeking to reclaim big cities Istanbul and Ankara from the opposition in the March vote, some analysts say higher inflation and unemployment and lower growth could test the president’s patience with the U-turn.

Erdogan has fired four central bank governors in four years. His push to slash rates despite rising prices led to a historic currency crash in late 2021 and sent inflation above 85% last year.

“The risk is ever-present that…Erdogan could lose patience,” said Commerzbank analyst Tatha Ghose. Inflation will “be very high for an extended period of time, which will trigger second-round effects such as wage settlements.”

The central bank has said inflation will likely rise to near 62% by year end, the upper bound of its earlier forcast, despite a more aggressive-than-expected 750-point rate hike in August.

  • Reuters