In the second quarter of 2024, Turkish growth fell below 3% year-on-year for the first time since 2019. On a quarterly basis, GDP even remained stable. Without the positive contribution of foreign trade and inventories, GDP would even have fallen.
This slowdown in activity reflects the effects of the tightening of monetary policy initiated in mid-2023, with the Central Bank's key interest rate raised from 8.5% on June 26, 2023, to the current 50%. As you can see from the graph, the average bank lending rate to businesses has risen from 15% to 60%, and from 30% to 70% to households.
As a result, domestic credit, which had largely underpinned growth in recent years in waves, has slowed sharply since mid-2023. More specifically, year-on-year growth in loans granted in Turkish lira to households and businesses by deposit banks fell back to around 30% year-on-year at the end of August, and 18% over 3 months on an annualized basis.
In real terms, the trend is even negative, as inflation was 52% year-on-year in August. While necessarily slowing growth, the slowdown in credit is actually a positive development for financial stability. It will enable the current account deficit, which is still high despite the fall in oil prices, to shrink, thus easing pressure on foreign exchange reserves.
In this scenario, exchange rate depreciation should slow down, and thus inflation too.
