2.1.1. Overview

Global growth remains subdued. In the last five years of weak growth across emerging economies, the Turkish economy performed relatively better. Gross Domestic Product (GDP) continued to grow steadily in the first half of 2016, albeit at a slower pace. The main driver of the first-half GDP growth was final domestic demand, while net exports made a negative contribution to growth. GDP narrowed by 1.8 percent year-on-year in the third quarter, growing by 2.2 percent over the first nine months.

Annual consumer inflation remained volatile across 2016 on the back of food inflation and fell to 8.5 percent at the end of 2016, overshooting the uncertainty band. Core inflation indicators posted a notable decline through the year but returned to an uptrend in December due to exchange rate developments in the final quarter. Weak economic activity prevented core inflation from deteriorating further. Recent exchange rate movements put an upward pressure on the inflation outlook. On the other hand, medium-term inflation expectations continue to hover above the target.

The risk sentiment remains volatile due to global uncertainty. Advanced economies hiked their interest rates after the US presidential election in November 2016. Heightened global uncertainty and volatile capital flows caused financial markets and exchange rates to fluctuate across emerging economies, including Turkey. Amid rising global interest rates and weaker risk appetite, emerging economies and Turkey saw increasingly slower portfolio inflows.

The alleviation in inflationist pressures, tightness in financial conditions and the moderate course of global financial markets allowed the CBRT to implement simplification in the interest rate corridor policy through measured and cautious steps in the March‑September period of 2016. Moreover, the CBRT also took a series of liquidity measures to curtail the adverse effects of the mid-July volatilities on financial markets and ensure efficient functioning of markets. In addition to those for the Turkish lira (TL) liquidity management, the CBRT took steps to support the liquidity in the FX market throughout 2016.

To curtail the effects of the recent increase in global uncertainties and exchange rate movements due to the high volatility, the CBRT implemented monetary tightening in November. Given the current global and domestic conditions, the CBRT’s monetary policy stance remained tight against the inflation outlook, stabilizing against the FX liquidity and accommodative against financial stability.

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