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Investing.com -- Over the past year and a half, the Turkish central bank’s net reserves have shifted from negative to a large positive. This change occurred alongside a decrease in the risk premium and a reduction in the current account (CA) deficit to 0.7%.
Despite high spending due to earthquake relief efforts, the budget deficit has decreased. The debt-to-GDP ratio has become one of the smallest in emerging markets, standing at 25.6%. Meanwhile, economic growth slowed to below 3%, preventing a sharp downturn, and the unemployment level remained below its long-term average of 10%.
BofA economists predicts that inflation in Turkey will drop to the mid-20s, down from 44.4% last year. This projection is based on a scenario that includes a 5-8% real appreciation, a negative output gap, and an average wage growth of around 30%.
In terms of international trade, Turkey is expected to continue being influenced primarily by its own policies rather than global policy changes. If there are shocks due to tariffs or trade wars, the CBRT is expected to use its reserves to reduce currency volatility.
BofA also anticipates the CBRT will reduce its policy rate to 30% in 2025 and 20% in 2026, as inflation is projected to be 25.7% (previously 25.3%) and 16%, respectively.
The rate path will heavily depend on data. January inflation was higher than expectations but in line with the CBRT projection, leading to an expected policy rate cut of another 250 basis points in March.
For 2022, BofA predicts a growth rate of 2.5%. Factors such as weak European growth, a strong Turkish Lira, and high labor costs are expected to limit export growth, while domestic demand will remain low due to the disinflation program.
The economy administration is focusing on inflation, which poses a downside risk to growth. The fiscal impact is getting smaller, with the budget deficit expected to decrease from 4.9% to 3.4% and the CA deficit predicted to be 1% (previously 0.5%).
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