OECD 'Turkey' report: More monetary tightening may be on the way

The OECD (Organisation for Economic Co-operation and Development) has raised its growth forecast for Turkey. 

Having estimated in February that the Turkish economy would grow by 2.9 percent in 2024, the OECD has revised this forecast to 3.4 percent. The organization maintained its 2025 growth forecast at 3.2 percent.

The OECD also projected that average inflation in Turkey would be 55.5 percent in 2024 and 28.9 percent in 2025. It estimated that core inflation would average 57.5 percent and 28.7 percent in 2024 and 2025, respectively.

Another detail that stood out in the statement released by the organization was that the expected decline in inflation has not occurred despite monetary tightening. According to the report, if inflation continues to remain high, further monetary and fiscal tightening may be on the way. 

The following assessments were included in the OECD report for Turkey:

"Tightening financial conditions and the negative impact of inflation on purchasing power will reduce household consumption. Investment activities are expected to remain strong, partly due to ongoing reconstruction following the 2023 earthquake. Exports will gradually strengthen as a reflection of the improving external environment. Inflation peaked at the beginning of this year but will remain high in 2024 and 2025.

'MORE MONETARY TIGHTENING MAY BE ON THE WAY'

Fiscal policy is expected to be contractionary following the significant increase in the deficit in 2023, which was partly due to earthquake-related expenditures. Monetary policy has rightly become restrictive, and the base interest rate has increased cumulatively by 41.5 percentage points since May 2023. However, if inflation continues to remain high, further monetary and fiscal tightening may be necessary. Structural reforms could support efforts to stabilize macroeconomic conditions and increase long-term growth potential. In particular, labor market reform would help increase the creation of high-quality registered jobs.

INFLATION ASSESSMENT

Growth remained strong in the last quarter of 2023, driven by strong private consumption. The contribution of net exports to GDP is also gradually improving. Despite tightening financial conditions, short-term indicators point to strong growth in domestic demand at the beginning of 2024. Production of consumer goods and retail sales increased at the beginning of the year, and activity in the construction sector remained dynamic due to reconstruction and repairs in the 2023 earthquake zone. However, inflation continues to remain stubbornly high. Annual consumer price inflation reached 68.5% in March, and although inflation expectations have decreased in recent months, they remain well above the 5% inflation target."

News Source: 12punto