IMF warns of Turkey’s inflation risks
The International Monetary Fund warned Turkey on Wednesday of inflation risks that could damage overall growth in the economy. In a generally positive report following regular consultations with Turkish authorities, IMF executive board members praised them “for setting the stage for more sustainable and balanced growth in 2012, accompanied by declines in the current account deficit and inflation”.
But the IMF directors noted that Turkish inflation remained above target and inflation expectations were still elevated. “Directors recommended that the central bank adopt a more forward-looking monetary policy stance and closely monitor developments in domestic demand, wages, and capital flows,” the IMF said in a statement after the Article IV consultations.
Many directors suggested that the central bank return to an interest rate policy under a conventional inflation-targeting framework. Still, a number of them thought that, in the current environment of volatile capital flows, the more flexible policy framework had served the Turkish economy well.
“In order to manage risks from excessive short-term capital inflows, many directors saw scope for greater use of sterilised intervention, given the relatively low level of international reserves, complemented with macro-prudential measures,” the IMF said.
In sterilised intervention, monetary authorities counter unfavourable foreign-exchange rates by offsetting the purchase or sale of domestic assets.