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Mar 13 2019

Turkey’s central bank vows to keep monetary policy tight

Turkey’s central bank said it will keep monetary policy tight so long as threats to price stability persisted.

Highlighting cost pressures, the central bank said on Wednesday that risks to inflation continued despite some easing in the headline rate and continued rebalancing of the economy.

Further monetary tightening will be carried out should price stability come under threat, the central bank said in a statement on its website, which detailed its reasoning for maintaining the key interest rate at 24 percent in a decision last week.

Investors are looking for firm commitments from the central bank to keep the benchmark one-week repo rate unchanged despite the country’s economy entering a technical recession, defined as two-straight quarters of negative growth.

"Elevated levels of inflation and inflation expectations, and uncertainties over the course of cost factors and pricing behavior continue to pose risks to the inflation outlook in the coming period," the central bank said. Policymakers will "maintain the tight monetary policy stance until the inflation outlook displays a significant improvement."

The central bank’s reputation took a hit last year after President Recep Tayyip Erdoğan sought to interfere in monetary policy, saying high interest rates fueled inflation. The bank reacted by delaying interest rate hikes as the lira slumped against the dollar, exacerbating concern for a full-blown financial crisis. It has kept the benchmark rate at 24 percent since September. Erdoğan has recently refrained from speaking out against central bank policy.

Gains for the lira against the dollar – the lira is trading at 5.46 against the U.S. currency compared with a record low of 7.22 reached in August – and weak domestic demand is helping the battle against inflation, the central bank said on Wednesday.

Turkey’s consumer price inflation rate fell to 19.7 percent last month from 20.4 percent in January. It has slowed from a 15-year high of 25.2 percent in October but is still almost quadruple the central bank’s medium-term target of 5 percent. Turkey has the highest inflation rate in major emerging markets after crisis-hit Argentina.