Tight financial conditions have helped rebalance domestic demand in the Turkish economy, the Central Bank of the Republic of Türkiye (CBRT) said on Friday, stressing that the disinflation process continues.
"The tightness in financial conditions has contributed to the rebalancing of domestic demand, and the improvement in the current account balance has become more evident," CBRT Governor Fatih Karahan said in a foreword of the bank's biennial Financial Stability Report.
Karahan said the bank keeps supporting its tight monetary policy stance with macroprudential policies.
"As a result, credit growth remains in line with the disinflation path," he noted. "As the monetary transmission mechanism is strengthened, prices in financial markets are formed in accordance with the policy rate and market expectations."
The major emerging market economy has cooled in the face of a monetary tightening campaign that began in June 2023. The central bank has since hiked rates to 50% from 8.5% in order to lower inflation.
Official data on Friday showed the economy grew by 2.1% in the third quarter, less than expected, as demand ebbed, especially in the services sector, under the weight of tight monetary policy.
Treasury and Finance Minister Şimşek said on Friday the economic activity would bounce back in the second half of next year.
The government sees full-year growth at 3.5%, compared to market forecasts of around 3%.
Slower than forecast economic activity in the third quarter could reinforce growing expectations of a rate cut in December.
The government predicts overall GDP growth of 4% next year as part of its campaign to end years of soaring inflation and to adjust the composition of economic growth to more sustainable settings.
Inflation eased to 48.58% in October from a peak of 75.45% in May, but the central bank has cautioned over the impact of food prices, which it says remained prominent in November.
"While consumer inflation dropped to 48.6% due to the improvement in core goods inflation, food inflation has increased in recent months," the bank said in the report.
The central bank sees inflation ending 2024 at 44%, before cooling to 21% in 2025. The government anticipates end-2024 and end-2025 inflation of 41.5% and 17.5%, respectively.
Karahan said the disinflation process sustains the interest and confidence in Turkish lira assets, noting the steady rise in the share of lira deposits.
"The substantial decline in the FX-protected deposit balance has strengthened the monetary transmission mechanism and reduced the risks to the central bank balance sheet," he added.
"The tight monetary policy stance that we are decisively implementing will continue to ensure that deposit rates remain at levels that will support Turkish lira savings."
The governor underscored that the current policy mix supports the improvement in risk sentiment and the subsequent decline in the risk premium, which he says has improved firms' and banks' ability to borrow from global financial markets.
"Despite tightening financial conditions, the deterioration in asset quality has been limited due to low corporate indebtedness," Karahan said.
"Banks' strong capital and liquidity buffers, in addition to their prudent provisioning policies, keep risks at manageable levels."
