Turkey central bank increases frequency of rates meetings

Turkey’s central bank increased the number of meetings of its Monetary Policy Committee to 12 next year from a previous eight. It did not provide a reason for the move.

The bank, criticised by some economists for cutting interest rates too aggressively in the second half of the year, said it would continue to act prudently in order to achieve lasting disinflation.

“Turkey’s inflation rate is still higher than that of peer economies,” the central bank said in a report on Thursday entitled “Monetary and Exchange Rate Policy for 2020".

“Continuation of the downward trend in inflation is of great importance for reducing the country risk premium and lowering long-term interest rates,” the bank said.

Turkey’s central bank has slashed interest rates by 1,000 basis points, or 10 percentage points, to 14 percent since July, when President Recep Tayyip Erdoğan sacked and replaced the bank’s governor for failing to reduce borrowing costs and support the government’s efforts to reverse a severe economic downturn. Erdoğan’s decision entrenched the view that the central bank had lost its independence from political decision-makers.

The central bank said its first objective on inflation would be to slow annual price increases to single digits, then gradually reduce them further to around 5 percent.

Annual consumer price inflation accelerated to 10.6 percent in November from 8.6 percent the previous month. It hit 25.2 percent in October last year, the highest level in a decade and a half, after a currency crisis swept through financial markets.

Decisive monetary policy alone will not be sufficient to reduce inflation, the bank said, saying efforts to ease structural rigidities in the economy, along with inertia and volatility in prices, would be crucial.

“Continuation of fiscal discipline is also essential to achieve price stability and steer the economy into a balanced and sustainable growth path,” the central bank said.

“Sustained fiscal discipline has been among the main factors that have reduced the vulnerability of the Turkish economy to external shocks. In the current conjuncture where global uncertainties remain high, it is crucial to maintain and further improve these gains.”

The central bank said it would closely monitor budget and fiscal policy developments and would respond to the repercussions of these policies on inflation when needed.

Turkey’s budget deficit widened by an annual 62 percent to 100.7 billion liras ($17.5 billion) in the first 10 months of the year as the government embarked on a spending spree to help revive economic growth. The galloping deficit came even after the Treasury and Finance Ministry drew on tens of billions of liras in emergency central bank funds.

Meanwhile, the central bank has worked with state-run banks to help stabilise the lira through operations in the swaps market. The currency hit a record low of 7.22 per dollar in August last year. It now trades at about 5.75 per dollar and has remained around those levels since October.

Commenting on the lira’s value, the central bank said it was not using exchange rates as a policy tool.

“The supply and demand for foreign exchange are mainly determined by economic fundamentals, the monetary and fiscal policies implemented, international developments and expectations,” the central bank said.  

The central bank’s Monetary Policy Committee next meets on rates on Dec. 12. Its first meeting of next year will be on Jan. 16.