Tight monetary policy to continue until significant decrease in inflation
Inflationary pressure and pricing behaviors will continue to be a crucial focus of the Turkish central bank until significant improvements are observed, while the bank will act decisively to ensure healthy financial stability
monetary policy will be sustained until convincing improvements in the underlying inflationary pressures and overall pricing behaviors take place, Central Bank of the Republic of Turkey (CBRT) Governor Murat Çetinkaya said yesterday.
In an interview with Anadolu Agency (AA), Çetinkaya emphasized that the bank’s monetary policy is clear and the tight stance will be maintained until a significant improvement in inflation dynamics is observed.
While drawing attention to the continuity of the tight monetary policy, Çetinkaya also stressed that in view of cyclical conditions, liquidity steps can be taken to support financial stability. “It would be more appropriate to evaluate liquidity-related practices within the context of financial transmission,” he said.
After price stability started to see disruptions following the high currency volatility in August and September, Turkey’s consumer price index hit a 15year high rate of 25.2 percent in October. Inflationary pressures prompted the central bank to raise its benchmark rate by 625 basis points from 17.75 percent to 24 percent on Sept. 13, 2018. The bank has not changed the interest rates since then.
Turkey’s inflation eased to 21.6 percent in November and 20.3 percent in December, and later recorded a slight increase to 20.35 percent in January.
The governor underscored the significance of a sound financial system or the effectiveness of the monetary policy.
“We think our focus on strong price stability supports the financial stability by increasing predictability. We pay
TIGHT
regard to the efficient functioning of financial intermediation both in terms of the monetary transmission mechanism and the balanced and efficient distribution of resources,” he said. “In this context, the central bank uses liquidity and required reserve instruments when needed. In this sense, we believe the various steps we took last year were instrumental in reducing market volatility and strengthening the transfer.”
Commenting on the sharp drop in the current account deficit, which came at $27.6 billion in 2018, Çetinkaya remarked that current account balance will improve in the periods of slowdown in economic activity. However, he added, weakening domestic demand is not the only reason for the decline in the current account deficit. Strong export performance and tourism revenues have also contributed to the balancing process.
“Supporting the improvement in the current account balance with measures in structural areas will contribute to balanced growth and price stability in the long run. In this context, especially the structural steps that will increase efficiency and competitiveness are crucial. The strengthening of savings and financial awareness are critical for the sustainability of the improvement in the current account balance,” Çetinkaya said. In reference to the global economic developments, the governor said, global developments affect the economy through various channels, particularly finance and trade. Recently, financial markets have been relatively calm but slowdown in global growth and concerns over trade policies may curb the risk appetite. “We assess all these developments and the possible risks in formulating our monetary policy response,” he noted.
“I should emphasize that the critical point is to boost the economy’s resilience to external shocks. From this point of view, we believe that strong adherence to macroeconomic policy coordination is crucial. The recent policy mix is a reflection of this awareness,” Çetinkaya emphasized.
When asked about the relation between the monetary policy and the economic activity, the CBRT governor particularly pointed out the determined stance toward price stability have so far supported balanced growth under the current conditions.
The Turkish economy grew 1.6 percent year-on-year in the third quarter of 2018, while recording a 7.3 percent expansion in the first quarter and 5.3 percent in the second quarter.
“The coordinated policies implemented to reduce inflation uncertainty have contributed to the decline in risk premium, thus improving Turkish liradenominated stable funding facilities, and lower long-term interest rates. This, in turn, supports the recovery in economic activity and investments,” Çetinkaya explained.
While Turkey’s credit default swaps (CDS) reached a maximum value of 566.38 points on Sept. 4, 2018, they were recorded at 299.68 points yesterday.
The decisive monetary policy stance of the central bank has also led to a decline in long-term interest rates since September. “Increased predictability in pricing will improve financing conditions and further extend maturities, contributing to the economy’s advancement along a sound path,” Çetinkaya said.
During yesterday’s trading, 10-year government bonds had a 14.5 percent yield. The 10-year bonds reached a maximum yield of 21.53 percent on Aug. 13, 2018 and a minimum yield of 7.91 percent on March 25, 2015.
The two-year government bonds also declined sharply from its highest level of 30.79 percent yield on Aug. 13 to 17.74 percent yield according to the market rates recorded yesterday.