In 2017, the US Central Bank (Fed) increased the interests by 75 base points, indicating that US economy’s recovery has reached a reasonable level. European Central Bank (ECB) stated that the economic program applied has been successful and they will scale back the quantitative easing. Recovery of the economies of the developed countries had a positive impact on the economies of developing countries and this has expedited the capital flow to those countries particularly in the second half of the year.

While recovery of the US economy accelerates…
Expectations for 2017 were the continuance of the recovery of US economy with Fed’s interest rate increases, expansionary monetary policies of European and Japanese central banks and acceleration of growth in the developing countries.

Although inflation in 2017 has been lower than expectations in the USA, employment market reaching closer to full employment level has increased the confidence in the economic policies. Considering the recovery of the US economy and to ensure price stability, Fed has increased the interests three times during the year by a total of 75 base points. In addition to that, Fed has announced that it will gradually decrease its bond portfolio of approximately USD 4.2 which were purchased since 2008 in order to increase the liquidity at the market.

On the other hand, President Trump has signed a draft bill on tax reduction and employment law. Accordingly, corporate taxes are reduced from 35% to 21% as of 2018. With the same bill, tax rates applied to individuals have also been reduced.

With US economy’s further recovery and President Trump’s expansionary fiscal policy, it is expected that Fed will increase interest rates three more times in 2018. However, if the economic data end up to be lower than expected or inflation does not meet the expectations, Fed may apply a tight monetary policy and take a more cautious stance.

Modest growth in European Union
While the recovery of European Union economy continued, better than expected PMI and industrial production data confirmed the success of the economic program applied.

As the studies on Brexit calendar continues, costs to European Union and England slowly rise to the surface. In line with the market dynamics, European Central Bank continued to apply an expansionary monetary policy and did not change the interest rates to support the EU countries. Policy interest remained at zero, deposit interest at -0.40% and marginal funding interest at 0.25%. However, at the last quarter of the year ECB has stated that, from now on the agenda will be around interest levels rather than quantitative easing or contraction. It has also been stated that improvement in inflation still does not meet the expectations.
High unemployment rates and debt stock in many European countries seem to be the main problems which need to be solved in the long run. In this context, due to the continuing problems in the EU and inflation being lower than expected, it is considered that ECB will continue the expansionary monetary policy for a while.

In 2017 ceasing of the decrease in growth rate of the Chinese economy in recent years has affected prices of oil and other commodities positively.

Increase inCommodity pricessupported the economies of the developing countries.

Expansionarymonetary policies will continue to be on the agenda for a while.

While US dollar gets stronger…
At the beginning of 2017, increase in US bond interests has caused the strengthening of US dollar index. This has caused sale of US dollars in developing countries and ultimately these countries’ currencies lost value. However, with bond interests stabilized and inflation running steady, funds flowing to the developing countries have accelerated again.

Another factor supporting the economies of the developing countries has been the increase in commodity prices, particularly oil prices.

Ceasing of the decrease in growth rate of the Chinese economy in recent years has also affected prices of oil and other commodities positively. This had a positive impact on the economies of commodity exporting developing countries and fund flow to these countries has accelerated from the second half of the year.

With the impact of strengthening currencies, inflation in countries like Brazil and Russia decreased considerably and this brought along interest rate decreases. Although the recovery of economies of developing countries has expedited compared to recent years, they are still far away from previous years’ average.

Turkish Economy

Strong foundation, proactive economy management, rapid growth

In 2017, uncertainties in global economy, geopolitical risks at our borders and higher than expected inflation had unfavorable impacts on Turkish economy.

11.92%inflation rate (as of 2017 year end)

In spite of those, fast decisions taken by the economy administration, solutions to economy’s needs such as applications like Credit Guarantee Fund, strong building blocks of the economy and a political authority experienced in economy administration led to a substantially higher than expected and strong growth performance.

Recovery in the Euro Region throughout the year had also affected Turkey’s exports which contributed to this growth.

The recovery in the Euro Region continuing to contribute to Turkey’s exports and developments in the global economy supporting the emerging markets, Turkey is expected to close the year with a growth rate which is substantially higher than expectations.

300 base pointsrise in interest

Turkish Lira’s loss of value against most developed countries’ currencies in 2017, particularly USD, had a positive impact on Turkey’s exports and tourism revenues. Since EU had the greatest share of Turkey’s export market, majority of Turkey’s export income is in Euro. On the other hand, import costs are mainly in US dollars. Increase in EUR/USD rate in the last quarter of the year has been another factor impacting the assessment of Turkey’s export performance in a positive way. However, an increase was observed in imports due to high growth. Consequently, in 2017 while there was a limited increase in current deficit, current deficit/GDP ratio is expected to be under 5%.

In spite of high debt rates in developed countries and expenditures made for immigrants staying in our country in 2017, by applying a financial discipline, Turkey was able to keep public debt at a lower rate although there is some increase in budgetary deficit.

Inflation rate in 2017 was 11.92% which is higher than expectations
Factors which affected the higher than expected inflation rate have been TL losing value against USD and EUR by 20% annually leading to a negative currency impact throughout the year and high food prices. With TL gaining some value, although limited, inflation is expected to decrease starting from the first quarter of 2018.

Steps taken by CBRT to ensure price stability are expected to have positive impact on financial stability as well as on capital and consumption expenditures.

<5%current deficit / GDP ratio

CBRT’s determined policy approach
Considering the global economic conditions and decreasing trend in inflation in 2016, CBRT has decreased the lending rates considerably. At the last quarter of the year with global conditions changing, CBRT started applying a tight monetary policy and increased policy interests by 50 base points to support Turkish Lira.

In 2017 to ensure price stability and to strengthen Turkish Lira, CBRT further increased interest rates by 300 base points, effectively recording a substantial increase in funding interests. Steps taken by CBRT to ensure price stability are expected to have positive impact on financial stability as well as capital and consumption expenditures.

In spite of high debt rates in developed countries and expenditures made for immigrants staying in our country in 2017, by applying a financial discipline, Turkey was able to keep public debt at a lower rate although there is some increase in budgetary deficit. It is expected that the same determination will continue in 2018.

In the following periods it is expected that continuing structural reforms will help Turkey shape its macroeconomic structure for 2018 and beyond and support sustainable growth.

ECBresorted to scale back quantitative easing.