Inflation remains one of the most pressing problems for Turkey’s economy, with the Central Bank of the Republic of Turkey vowing to act on lira volatility by changing monetary policy stance if exchange rate moves had a lasting affect on price stability. The move saw the Turkish lira stabilising against the US dollar, firming to 5.3372 from 5.3843 as of 16:00 GMT. As its worst, the Turkey currency tumbled by as much as 47 percent versus the American greenback this year off investor concerns about the bank’s ability to rein in prices. It has since recovered somewhat but is still down some 30 percent, year-to-date.
In its 2019 monetary and exchange rate policy document, the central bank stressed its first objective was to bring down inflation to single digits, and then gradually reduce it and stabilise it at around 5 percent.
The bank said: ”If exchange rate movements permanently affect price stability, the CBRT will change its monetary policy stance and give the necessary reaction.”
A treasury desk trader at one bank told Reuters: “The central bank’s stress on a monetary policy focused on inflation seriously reduced selling pressure on the lira, indeed reversing it.
“This text does not contain any comments pointing towards the December 13 MPC (monetary policy committee meeting) but it is important in showing it may make a similar assessment at the MPC stressing inflation.”
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The currency sell-off has driven up the prices of everything from food to fuel, and has deepened worries about the broader impact on the real economy and banks.
Inflation was at 21.6 percent last month, near its highest in a decade and a half.
The bank said: ”The inflation target has been kept at 5 percent as per the agreement reached with the government.
“Fiscal discipline is essential in fighting inflation.
“The coordination between monetary policy and fiscal policy is therefore crucial with respect to disinflation and macroeconomic rebalancing.”
Finance Minister Berat Albayrak has stressed the importance of coordination between fiscal and monetary discipline in fighting inflation.
Although economists have said the financial markets would be more convinced by stronger messages to guarantee the bank’s independence.
Much of the lira sell-off was sparked by comments from President Tayyip Erdogan, a self-described “enemy of interest rates” who has repeatedly called for lower borrowing costs.