Turkey: High Inflation and FX Volatility

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Inflation surged above 8% (y-o-y) in each of the last three months, while a widening current account deficit (US$5.8bn in July) continues to put pressure on the lira. Much of the recent growth improvement has also been attributed to short-term factors, which might not be sustained, with household consumption and public sector investment accounting for a large part of the upturn. The central bank is under pressure to stem the decline in its currency, which has dropped more than 10% in the year to date. However, it has so far resisted calls to raise policy rates, currently at 3.5% for borrowing and 7.75% for lending, as it believes that capital flight will be temporary, solely relating to uncertainty regarding the eventual tapering of US Federal Reserve policy. Inflation looks set to remain above the government’s original end-year target of 5.0%, but should come down sharply in Q4 (see monthly inflation data and forecasts, bottom left box).

Prime Minister, Recep Erdogan, has pledged to maintain most of the planned US$19.2bn of infrastructure spending that formed a large part of its unsuccessful bid to host the 2020 Olympics. Critics see the move as a bid to boost his popularity ahead of key elections next year. However, anti-government protests have resurfaced in recent days, albeit on a smaller scale than those held earlier in the year.

You can download a sample of Eastern Europe Consensus Forecasts at www.consensuseconomics.com.

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