Turkey Central Bank Statement

Author: | Published: 5 Sep 2017
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Turkey has been implementing a price-stability-oriented monetary policy along with a floating exchange rate regime since 2001. This framework has been successful in bringing inflation down to single digits. It has been also helpful in coping with various shocks during the past decade. Although inflation was higher than peer emerging economies during this period, it has been relatively stable compared to previous decades, materialising at around 8%.

Having consolidated the benefits of single digit inflation, time is ripe to bring inflation further down to our medium-term target of 5%. To this end the Central Bank of Turkey (CBT) has formulated an integrated approach in 2016 to achieve and maintain a lower and more stable inflation. This approach preserves the price-stability-oriented monetary policy but also aims to complement this strategy by identifying the structural impediments to disinflation and promoting a coordinated effort.

The past year has been a demonstration of how coordinated policies can ease the trade-offs. Turkey has been hit by a series of inflationary shocks since mid-2016 such as increases in food prices, tax adjustments, higher oil prices, and the sharp exchange rate depreciation. Inflation has jumped from 7% to 12% in a short period. This episode coincided with a weakening in capital flows and a slowdown in the economic activity, leading to significant policy trade-offs.

Turkey has formulated a concerted policy mix to overcome such challenges. The first response was to let the floating exchange rate regime act as shock absorber. Second, the CBT reacted to inflationary shocks by delivering a strong monetary tightening to anchor inflation expectations. Third, as part of the coordinated policy response, macroprudential and quasi-fiscal buffers were utilised to avoid an adverse feedback spiral between economic activity and asset quality; hence, supporting the credit channel and domestic demand.

The policy has been largely effective in containing inflationary pressures and avoiding a recession. Economic activity has recovered swiftly after a very brief contraction period. Exchange rate market has been stabilised and business confidence was restored. Inflation expectations were stabilised and the disinflation trend has resumed. Overall, this episode not only demonstrated the benefits of policy coordination but also showed the value of accumulating buffers in good times.

Recently, we have been working jointly with other relevant institutions on three additional dimensions to further ease the policy trade-offs and pave the way for price stability. The first dimension is to enhance fiscal-monetary policy coordination. The second is to contain the excessive volatility in food prices through a comprehensive plan which will support the productivity and efficiency in the agricultural sector. Third, a new project was initiated by the Financial Stability Committee to mitigate the risks emanating from corporates' FX borrowing. We plan to amend the existing regulations to discourage excessive FX risk taking by non-financial firms and encourage the adoption of better risk management practices for all parties.

To sum up, monetary policy is committed to achieving and maintaining price stability in the medium term. Accordingly, the CBT does not only maintain a tight monetary policy stance but it also contributes to structural efforts for disinflation by identifying the source of the trade-offs, raising public awareness, and guiding relevant authorities to formulate targeted solutions. We believe that this approach will not only improve the policy trade-offs but also safeguard a more sustainable disinflation process.




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