Turkey central bank urges decisive government steps to help slow inflation

Turkey’s central bank said decisive steps by the government and other economic actors were needed to ensure that a goal of reducing inflation is successful.

Structural reforms to curtail volatility in inflation will contribute to more stable prices, the central bank said in an open letter to the government to explain why inflation goals were missed last year.

“The inflation-targeting regime mainly relies on focusing and commitment of all layers of the society on price stability as well as the decisive steps to be taken by the decision-makers and policy-makers,” the central bank said.

Turkey’s central bank missed its inflation target of 5 percent last year after the government encouraged a borrowing boom by businesses and consumers to offset the adverse effects on the economy of the COVID-19 pandemic. Consumer price inflation accelerated to end the year at 14.6 percent.

The central bank said it will cooperate and communicate in an explicit and truthful manner to ensure that the battle against inflation is endorsed by all parties.

Rapid credit expansion last year had “spawned adverse effects on the current account balance, external financing facilities and the inflation outlook”, the central bank said. Higher commodity prices and losses for the lira have added to inflationary pressure, it said.

“Both direct and indirect channels of the strong credit impulse were the main determinants of inflation” in the second half of 2020, the bank said.

Monetary policymakers have more than doubled interest rates to 17 percent from 8.25 percent since September to help rein in inflation and to defend the lira, which lost 25 percent of its value last year. The central bank has vowed to keep interest rates elevated until inflation slows towards the 5 percent goal.

The bank’s interest rate policy faces potential resistance from the government. President Recep Tayyip Erdoğan said on Monday that the country will not achieve inflation targets with high interest rates. Erdoğan has said regularly that higher rates are inflationary, a view that contradicts with conventional economic wisdom.

The government plans to present a package of economic reforms to parliament this month. It has yet to announce details of the measures.