The EBRD has cut its 2014 GDP growth forecast for Turkey to 3.3% from a previous 3.6%. The EBRD has kept the 2013 GDP growth forecast unchanged at 3.7%.

Growth in Turkey is likely to moderate somewhat to 3.3% in 2014, from 3.7%, reflecting monetary tightening and an increase in financing costs linked to higher political risks which are pulling growth back, says EBRD’s latest Regional Economics Prospects report.

Nevertheless, domestic demand is still expected to grow, albeit at a slower pace, and net exports may benefit from a recent depreciation of the currency, according to the Report, which also underlines that still high current account deficit leaves the economy vulnerable to further shifts in global market sentiment.

Recent elevated political uncertainty coupled with the Fed’s decision to begin tapering off its quantitative easing programme in December, has renewed pressure on the currency and increased the risk premium facing the country, the Report notes.

Average annual inflation -7.4% in 2013- is expected to remain elevated above the target in 2014 at 7.3%, driven by the recent tax hikes and currency depreciation passing through to inflation, and less favourable base effects of food and energy prices, the Report says.

Another downward risk to the outlook stems from a continuation of political uncertainty at the high levels seen recently throughout the long election cycle over the next year but a quick political stabilisation would help consolidate financial condition and confidence and boost domestic demand, according to the Report.