Türkiye's economy is forecasted to grow at 3.4% this year and 3.2% in 2025, the Organization for Economic Co-operation and Development (OECD) said in its report on Thursday, lifting this year's projection from 2.9% in its last report published in February.
The organization kept its forecast for the next year at the same level.
"Investment activity is expected to remain strong partly due to the ongoing reconstruction following the 2023 earthquake. Exports will gradually strengthen reflecting an improved external environment," the Paris-based organization said.
Despite tighter financial conditions, short-term indicators indicate still solid domestic demand growth at the beginning of 2024, the report said.
"Total investment will remain strong as earthquake-related reconstruction continues, and as an improved external environment helps restore export growth."
Moreover, the OECD said that higher costs arising from further disruptions to transportation and trade could have negative effects on the economy. "In contrast, growth could be boosted further by a stronger influx of foreign investment due to credible improvements in fiscal, financial and monetary policy," it added.
Türkiye embarked on a long phase of interest rate hikes after the shift in monetary policy last year, which saw the central bank's key policy rate rising to 50% as of March. The Turkish economy expanded at 4.5% last year on strong household consumption.
Although the organization cited the effects of last year's devastating earthquakes on the exports, it said that "robust growth in the tourism sector" helped to partly offset the goods deficit.
"A record 50 million tourists visited Türkiye in 2023, despite the rise in Middle East tensions since October. Short-term indicators point to improving demand conditions among Türkiye’s main trading partners and exports have already strengthened at the beginning of 2024," it said.
In its report, the OECD highlighted the monetary policy to become "rightly restrictive," as the rates have climbed by a cumulative 41.5 percentage points since May 2023, but added that further monetary and fiscal tightening may be necessary if higher inflation persists.
Authorities expect the annual inflation rate to rise before entering a steep downward trend from the second half of this year. The country's statistical office is set to announce the latest figure of the consumer price index (CPI) on Friday. The inflation was running at 68.5% in March, according to the official data.
"The monthly maximum interest rate on cash advances from credit cards and overdraft accounts has also been raised. The central bank has also taken steps to reduce excess lira liquidity, including lira deposit buying auctions. Nevertheless, further monetary policy tightening may be required if inflation expectations remain unanchored," the OECD said.
"The projections assume the policy rate will remain at 50% until well into 2025," it added.
According to the OECD's outlook, inflation is expected to ease to 55.5% and 28.9% this year and in 2025, respectively, in Türkiye.
Tight policy needs to be maintained
Talking to Anadolu Agency (AA) on Thursday OECD Chief Economist Clare Lombardelli said the monetary and fiscal policy changes in the country are very welcome as they are "exactly what the economy needs, given the huge challenge of inflation."
"Inflation is still high in Türkiye, but we are expecting it to come down," she said. Lombardelli said she expects Türkiye's exports to rise as the global economy picks up. The OECD on Thursday revised the global economy outlook upward to 3.1% this year and 3.2% next year, led by stronger real income growth and lower policy interest rates.
"So we have some reasons for optimism for the Turkish economy, but the tight policy will need to continue as long as it takes to bring inflation down," Lombardelli said.
"We are projecting that the 50% policy rate will need to be maintained throughout the rest of this year and well into the next year, possibly by the second quarter of 2025," she noted, reiterating the statement from the outlook report.
She said she does not expect policy relaxation, noting that it takes time for these tighter policies to feed through the economy and bring down inflation.
"We may see some loosening on monetary policy if inflation comes down in Türkiye, but for the foreseeable future, it is right to keep this monetary stance and keep an eye on whether it needs to be tightened," Lombardelli said.