R sks cont nue to bu ld

Our core v ews for the Turk sh economy th s year have been that the economy s overheat ng – w th a pos t ve output gap and ars ng current account def c t; nflat on w ll rema n stubbornly h gh as a result, and the qual ty of external f nanc ng w ll deter orate, leav ng the Turk sh l ra vulnerable. Reflect ng these v ews, we have been forecast ng

150 bas s po nts of rate h kes th s year – w th r sks to the ups de the longer th s t ghten ng s delayed – and have held a conv ct on v ew to pay rates. Wh le we have penc lled n th s t ghten ng for Q3, we th nk the t m ng of h kes w ll be largely a funct on of currency volat l ty and, therefore, s unusually uncerta n. The Turk sh l ra has deprec ated by 8 percent aga nst the U.S. Dollar th s year and s fall ng at a rap d pace. If th s deprec at on cont nues nto the Central Bank of Turkey’s (TCMB) meet ng on Apr l

25, we expect the 150bp of rate h ke to be brought forward nto Q2. However, we rema n scept cal that the TCMB w ll t ghten suff c ently to correct the underly ng cause of the TRY volat l ty and the pers stently h gh nflat on. Our est mates show the output gap approach ng 3 percent of GDP, and our Current

Act v ty Ind cator (CAI) suggests that sequent al growth rema ns strong. (Apr l 13)