Turkey 11% economic growth fuels expectations of rate hike

*
People sit on benches near the Bosphorus bridge in Istanbul (file). Turkey’s gross domestic product expanded 11.1% in the three months to September 30 from a year earlier, the fastest pace in more than six years, according to official data released yesterday.

Turkey’s economy grew faster in the third quarter than any other of the world’s 20 biggest economies as household spending and exports surged, stoking expectations that the central bank will increase borrowing costs to curb inflation.
Gross domestic product expanded 11.1% in the three months to September 30 from a year earlier, the fastest pace in more than six years, according to official data released yesterday. The median estimate of economists in a Bloomberg survey was 8.5%.

Raising borrowing costs could put the central bank on a collision course with President Recep Tayyip Erdogan, who said in November that the bank was on a “wrong path” in its fight against inflation, and reiterated his unorthodox view that lower borrowing costs would better address price gains.

Turkey increased spending on everything from wages to investments, and extended cheaper credit to companies to counter the impact of last year’s failed coup attempt on the economy. The annual comparison with the third quarter in 2016, when the attempt to topple Erdogan caused the economy to contract, helped boost yesterday’s figures. But with growth driven mainly by domestic consumption at a time when inflation is at the highest level since 2003, the central bank will likely tighten monetary policy when it meets on Thursday, according to Inan Demir, an economist at Nomura International in London.

“Even though the headline growth rates do paint a very positive picture, the composition of growth has been a factor that undermined the lira in recent months,” he said. Deputy Prime Minister Mehmet Simsek said yesterday that economic growth based solely on domestic demand wouldn’t be sustainable, and that more balance is needed. Third-quarter growth “is an exceptional figure,” he said in an interview with state-run TRT television. “It is based on the low growth in the third quarter last year. Turkey needs to carry out more reforms to have a 5.5% to 6.5% growth sustainable.” The lira was little changed after the data.

Growth will likely “slow sharply in the coming quarters,” Capital Economics said in a note. “Even so, today’s GDP data, coming alongside November’s jump in inflation, mean a rate hike at Thursday’s MPC meeting now looks highly likely.” That view was not shared by Economy Minister Nihat Zeybekci, who warned against what he called speculative attempts to make profits based on expectations of higher rates. The regulator will make a decision based on the national interest, Zeybekci said, adding that the best way to fight soaring inflation was to increase production rather than interest rates. “Money should be cheap, plentiful and easily accessible,” Zeybekci said in an interview with Bloomberg HT yesterday.

 

Sources and photo-credits: Gulf Times