Turkey Central Bank Statement

Author: | Published: 19 Oct 2018
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The Central Bank of Turkey (Türkiye Cumhuriyet Merkez Bankası, TCMB) has been implementing an integrated strategy in recent years to achieve and maintain price stability in the medium term. This approach has two main pillars: 1) a sound and predictable monetary policy framework that provides a timely response to expected inflationary pressures; and 2) identifying the structural impediments to disinflation and promoting a coordinated effort among relevant institutions.

This holistic strategy adopted by the Central Bank has supported the resilience of the Turkish economy against multiple shocks, especially the perfect storm Turkey has recently faced.

Starting in H2 2017, we witnessed heightened geopolitical and global risk as well uncertainty stemming from external and domestic factors, including the retrenchment of global liquidity conditions and elevated concerns of possible trade wars. These uncertainties coincided with a widening in the domestic current account deficit and rising inflation, which have further dampened the investor risk appetite and led to increased volatility in the financial markets. The consequent depreciation in the lira materialized amid a persistent oil price shock, which compounded upside inflationary pressures.

The TCMB reacted by delivering a strong and front-loaded policy tightening. Moreover, we used several supplementary instruments such as currency swaps, domestic currency settled forward auctions, and reserve requirements to smooth the excess volatility in the markets. Finally, the operational framework for monetary policy was fully simplified to increase the predictability of monetary policy. All these efforts were instrumental in driving down market volatility and calming inflation expectations.

Recent economic data indicates that the rebalancing process had already started in Q2 2018. The output gap will gradually close throughout the year. Inflationary pressures are expected to subside towards Q4 as the pass-through effects gradually fade away and the cyclical downturn closes the output gap. On the other hand, goods and services export revenues remain strong, thanks to a synchronised global recovery. Such a growth composition bodes well for the external deficit. With the support of the recovery in tourism revenues, we expect to see a persistent improvement in the current account deficit starting from mid-year.

Going ahead, we will continue to use all available instruments in pursuit of the price stability objective. Inflation expectations, pricing behaviour and other factors affecting inflation will be closely monitored and monetary policy will be adjusted to ensure that inflation converges to the targets within a reasonable period.

As a complementary policy on the structural side, we have been working jointly with other institutions to ease policy trade-offs and pave the way for price stability. During the past year, substantial progress has been made to mitigate the risks emanating from corporates' FX borrowing. Existing regulations have been amended to link FX borrowing to FX income, especially for small and medium enterprises, which will curb excessive FX risk taking motives by corporates.

Overall, the TCMB not only maintains a tight monetary policy stance but also contributes to structural efforts for disinflation by identifying the source of the trade-offs to formulate targeted solutions. All these efforts demonstrate our commitment and willingness to achieve and maintain a low and stable inflation environment.