Türkiye: Tight Monetary Policy Drives Disinflation, Eases External Liquidity

Credit growth in local currency decelerated to 30% YoY in August 2024, down from 69% one year before. A more restrictive policy mix is expected to prolong the near-term economic slowdown, with real GDP growth of 3.5% in 2024 (although higher than a previous projection of 3.2%), and 3.2% in 2025 (unchanged), down from 4.5% in 2023.

Carefully Managed Policy Adjustments Unwind External Imbalances, Rebuild Buffers

The continued benefits of Türkiye’s monetary policy pivot, assuming the authorities hold their course, remain significant in putting the economy on a sounder footing in terms of financial stability and potential growth.

One key indicator of progress is moderating tensions on the balance of payments, due to lower financing requirements and more diversified funding sources.

The current account turned positive in June-July 2024 and the surplus will widen further should the current policy stance be maintained. On a calendar-year basis, the current account deficit will likely narrow to 1.8% of GDP in 2024, down from 4.0% in 2023.

This improvement in the current account is largely supported by a stronger trade balance, underpinned by lower energy and gold imports, alongside dynamic goods exports and tourism receipts as the depreciation of the lira boosts external competitiveness, further supporting these trends.

Growing confidence in the authorities’ willingness to stick to a balanced policy mix also points to lower foreign-currency protected deposits and higher future foreign capital inflows, helped by the removal of Türkiye from the Financial Action Task Force’s grey list and lower US interest rates. Non-resident holdings of domestic debt rose from about 2% in December 2023 to 9% in July 2024, a sign of confidence in lira-denominated assets and lower dollarisation of the Turkish economy.

Figure 2. Improvement in the current account balance drives higher net foreign assets (NFAs)

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