Investment bank HSBC increased its year-end forecast for the policy rate in Turkey from 30 percent to 32.5 percent. The bank kept its 2023 growth expectation at 4.4 percent, but trimmed 2024 projection.
Positive messages from the economic management team continue to lead to revisions in foreign investors’ expectations regarding the monetary policy path.
HSBC made a moderate revision in its year-end policy rate expectation. In the report prepared by HSBC CEEMEA Economist Melis Metiner, the bank’s forecast was increased from 30 percent to 32.5 percent. Policy rate is currently 25%, with consensus expectation for Thursday’s Central Bank MPC meeting being another 500 basis point hike.
The report emphasized that Turkey’s near-term outlook has improved significantly in the last four months, as the new team at the Central Bank has tightened monetary and macroprudential policies and started to loosen some previously implemented regulatory measures.
Pointing out that in July, the government decided to increase the value added, special consumption, income and corporate tax rates in order to finance increasing expenditures, most of which were for the reconstruction in the earthquake zone, the bank’s economist said that as a result, the budget had a surplus in July and August and the 12-month cumulative deficit fell below 3 percent of GDP.
The bank’s report underlines that the new economic management has emphasized at every opportunity that policy making will become more rational, transparent and rule-based in the future.
Despite these positive developments, according to the bank, risks continue in Turkey.
In the report, Melis Metiner stated that the imbalances in Turkey (inflation, foreign exchange leverage, foreign exchange supply, central bank reserves) are large and that resolving them will require a difficult adaptation process.
The bank said indications from officials were that they preferred a much more gradual and therefore modest economic rebalancing over at least the next 12 months.
Growth projections downgraded, interest expectations changed
Following these evaluations, the bank announced that it continues to estimate 2023 growth as 4.4 percent. The 2024 GDP growth forecast was reduced from 4.1 percent to 3.0 percent.
The bank expects monetary policy to be tightened a little more than before and the policy rate to be 32.5 percent at the end of this year. The previous expectation here was 30 percent.
The bank expects a more limited budget deficit for 2023. However, Metiner thinks that official spending forecasts may be exceeded in 2024 with the local elections to be held in March.
The bank, which expects larger current account deficits in 2023 and 2024, comments that the possibility of Turkey avoiding a balance of payments crisis has increased significantly.
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