EBRD raises Turkey 2025 growth forecast, flags political, market risks

By Canan Sevgili and Libby George

LONDON, Sept 25 (Reuters) - The European Bank for Reconstruction and Development has raised its 2025 growth forecast for Turkey but warned that political tensions, volatile investor sentiment and tighter global financing conditions continue to pose significant risks.

In its latest report covering economies in its region that stretches from emerging Europe to Central Asia, the Middle East and Africa, the EBRD upgraded its May projection by 0.3 percentage point to 3.1% for 2025, while keeping Turkey's 2026 growth forecast unchanged at 3.5%.

The bank expects Turkey's growth to remain in the 3.1%–3.5% range over 2025–2026, supported by easing financial conditions.

"Political tensions, volatile risk sentiment, and tighter global financing conditions remain key risks, given Turkey's substantial short-term external financing needs," the report said.

The detention of Istanbul Mayor Ekrem Imamoglu - seen as President Tayyip Erdogan's strongest rival - in March caused the lira to plummet and triggered market turmoil. This prompted the central bank to make a surprise interest rate hike in April, short-circuiting an easing cycle that began at the start of the year.

EBRD Chief Economist Beata Javorcik told Reuters that these measures reflect a commitment to price stability. Turkish authorities appear determined to combat inflation despite the economic costs of high interest rates, Javorcik said.

"My sense is that the Turkish authorities realized that while fighting inflation is costly — because high interest rates are slowing the economy — the cost of inaction and letting inflation spiral would be even higher," Javorcik added.

Javorcik noted that authorities are reining in private credit, effectively limiting banks' ability to lend, while allowing the currency to appreciate in real terms.

"This has helped curb inflation through the import channel, even though it comes at a cost for exports. All indications point to a clear commitment to a disinflationary path."

The EBRD also highlighted that easing tensions in Syria and the Caucasus, combined with closer cooperation with the European Union, could enable Turkey to leverage its established strengths in construction, logistics and defence.

Turkey was the London-headquartered development bank's single biggest investment destination in 2024.