The European Bank for Reconstruction and Development (EBRD), which released the latest edition of its Regional Economic Prospects report on May 14, maintained its 2015 GDP growth forecast for the Turkish economy at 3%.

Growth in Turkey will remain broadly unchanged at 3% in 2015 and 2016, significantly below the country’s long-term potential, said the EBRD in the report, adding that the positive effect of lower oil prices is expected to be offset by weaker external demand and limited room to cut interest rates, due to pressures on country risk premium and the exchange rate.

The volatility of capital flows as a consequence of Fed tightening and diverging monetary policies between the US and Eurozone, is a downside risk to the Turkish economic outlook in 2015 and 2016, warned the EBRD.

Turkey’s competitiveness with the Eurozone would be squeezed while its borrowing costs and pressures for capital outflows would increase as US monetary policy tightens, said the Bank.

Further risks may come if a recovery in Eurozone does not take hold, or in a case of further worsening of the geopolitical tensions in the Middle East and Ukraine, as well as deterioration of business sentiment in case of perceived weakening of regulatory and press independence following summer elections, according to the Bank.

In 2015, declining commodity and oil prices are expected to contribute to growth, although their benefit may remain limited since central bank’s space to cut interest rate will remain constrained by ongoing currency pressure on inflation, according to the EBRD.

Although inflation is expected to moderate in the remainder of 2015, on the back of lower food inflation in the second half of the year, it is likely to remain elevated above the target, as the past currency weakening is passing through to inflation, said the Bank.

Here are the other comments by the EBRD on the Turkish economy:

* The higher-than-target inflation and moderation in global liquidity as the Fed tightens its policy, will keep both lira and foreign currency cost of financing high throughout 2015 and 2016.

* The higher cost of financing will constrain private consumption, weighing on growth.

* Net exports may benefit from better-than-expected growth in the Eurozone, resulting in economic growth of 3 per cent in 2015 and in 2016.

* On a positive note, the public finances of the country remain strong and banking sector is well capitalized, with low NPL ratios.