Turkey: Mixed signals

5 min

The Monetary Policy Committee (MPC) kept its set of policy interest rates unchanged last week, as inflation eased slightly to 11.9% y/y in December and the TRY stabilized against the USD since the previous MCP meeting in mid-December (though it lost -3% against the EUR). We do not expect rate hikes in the near term since inflation is forecast to ease slightly to an average 9% in 2018 while GDP growth should slow, so that the MPC is likely to begin modest monetary loosening this year. Meanwhile the current account balance posted a hefty deficit of –USD4.2bn in November, taking the cumulative shortfall in the first 11 months of 2017 to –USD39.4bn, a +37% y/y increase. Worrisome, net FDI inflows covered only 19% of that shortfall. While the trade deficit widened to –USD51bn in January-November (–USD14bn y/y) largely due to the weakened TRY, the services surplus increased by +USD4bn to +USD19bn as tourism from Russia rebounded last year. On a positive note, Turkstat’s Consumer Confidence Index jumped to 72.3 points in January, up from 65.1 in December and well above the average 68.6 recorded for all of 2017. This bodes well for retail sales growth – which picked already up to an average +3.3% y/y in October-November from +1.4% in Q3 2017 – in the next months.