Turkish economy is positioned to stage a modest recovery

The Turkish economy is positioned to stage a modest recovery growing at an annual average rate of 3.3% in 2015- 16, up from 2.9% in 2014. The Central Bank of the Republic of Turkey's (CBRT) recognizes that external economic and financial market conditions remain problematic given domestic economic and political challenges, concerns of slower growth in China, and prospects of monetary policy normalization in the US. 

Meanwhile, Turkish consumer price inflation continues to hover well above the CBRT's medium-term target of 5% at 7.1% y/y in August. Nevertheless, after losing its majority at the June 7th general elections, President Recep Tayyip Erdoğan, the de facto leader of the governing Justice and Development Party (AKP), has prevented the formation of a coalition government, which has prompted a snap election in November. Over the coming months, heightened political instability will likely continue to temper business and investor confidence, and could lead to bouts of financial market volatility and an acceleration of capital outflows. In this complex environment, the CBRT will likely maintain a cautious monetary policy stance.

Looking ahead, however, Turkey's current account deficit is expected to narrow, underpinned by the weaker lira and low oil prices. Inflationary pressures should also continue to ease to a year-end rate of 7.5% y/y in 2015 and 6.1% in 2016 on the back of lower energy prices, softer domestic demand, and relatively tight monetary policy.