Turkey's central bank may face growing political pressure to cut interest rates despite rising inflation if the government pursues populist economic policies in the run-up to a general election next June, Fitch warned on Thursday.
Progress towards economic re balancing may become more challenging this year, the ratings agency also said, noting that looser monetary policy since May, the fragile euro zone recovery and risks from wars in the Middle East and Ukraine could slow the decline in Turkey's current account deficit.
"What concerns us most (about monetary policy) is something of a disconnect here in the sense that (when) we talk to policy makers ... the clear message is that disinflation is the number one priority," Paul Rawkins, senior director in Fitch's sovereign group, told a conference in Istanbul.
"Yet if you look at policy settings, it's clear interest rates have come down. It does send a pretty confusing message ... it raises issues about central bank credibility, and it raises questions about the duration of economic re-balancing."
Data on Wednesday showed the Turkish economy grew less than expected in the second quarter, increasing political pressure on the central bank to cut interest rates further and helping send the lira to its lowest for more than five months.
The ruling AK Party has a strong record on the economy and can ill afford a slowdown in the run-up to the election.
President Tayyip Erdogan, prime minister until last month, has been a frequent critic of central bank policy, urging sharper rate cuts to spur growth. Economy Minister Nihat Zeybekci said the latest growth figures justified that stance.
"Economic populism remains a risk ahead of next year's parliamentary elections," Fitch, which rates Turkey BBB- with a stable outlook, said in a statement.
"Political pressure ... to cut interest rates shows no sign of easing. Indeed, we believe such pressure may intensify following this week's (second quarter growth figures)."
Fitch also said a resumption of rapid credit growth and a sustained downturn in capital inflows would pose a risk to Turkey's rating.
Positive triggers for Turkey's outlook would include a "material and durable reduction" in the current account deficit, an improved external financing mix, lower and more stable inflation, a stronger build-up of international reserves and structural reforms that raise domestic savings, the agency said.
REUTERS