Turkey’s central bank will apply its inflation-targeting regime decisively utilizing all of its tools, its chief said Friday.
Monetary policy decisions will be taken by maintaining the focus on price stability, Central Bank of the Republic of Turkey (CBRT) Governor Naci Ağbal said, a day after the bank hiked its key policy rate by 200 basis points in a bigger than expected move as it seeks to cool double-digit inflation.
Ağbal was speaking during a presentation to the Parliament’s Planning and Budget Commission regarding the central bank’s activities and monetary policy practices.
The governor suggested that lasting price stability would lead to economic growth by increasing investments and production.
Ağbal also explained that price stability meant inflation coming down to such a low level that it no longer plays a role in investment and consumption decisions.
“The upward risks associated with inflation require a firm and decisive stance in monetary policy,” the governor said.
"A tight monetary stance will be continued with determination until there are strong indicators of price stability and a permanent decline in inflation," he said.
The CBRT on Thursday lifted its one-week repo rate to 17% from 15% at the last Monetary Policy Committee (MPC) meeting of the year. It again pledged to “decisively” keep policy tight to permanently lower inflation, which stood at 14% last month.
It said the “strong” tightening was meant to “eliminate risks to the inflation outlook, contain inflation expectations and restore the disinflation process as soon as possible."
Ağbal last week told reporters that the Turkish lira’s drop this year has kept inflation well above the bank’s target range of around 5%.
Yet, he stressed that the bank was determined to meet its inflation forecast of 9.4% for the end of 2021.
He said the goal for 2023 was to achieve its long-held target of 5%.
The tightening Thursday followed a hefty hike of 475 points last month, which was Ağbal’s first move after taking the bank’s reins.
One-week repo rate main policy tool
The bank simplified its monetary policy following the meeting by saying that all funding will be provided through the main policy rate, the one-week repo rate.
“The CBRT’s monetary policy tool is the one-week repo rate,” Ağbal said, stressing that the interest rate corridor and late liquidity window tools would not be used outside of their defined purposes.
“In no way will the late liquidity window or interest rate corridor be used in 2021 to replace the main policy tool,” he noted.
The bank’s Twitter account quoted him as saying the bank will not buy or sell forex to determine an exchange rate.
Ağbal also stressed that the bank will aim to increase its forex reserves in a transparent way. He last week said that rediscount credit returns should add $21 billion (TL 160.12 billion) in 2021.
Strong course in economic activity
The governor also said that the indicators for the last quarter of 2020 point to a strong course in economic activity.
Driven by fiscal stimulus and the lifting of virus-related lockdowns, the country's gross domestic product (GDP) grew 6.7% year-on-year in the third quarter, after contracting by 9.9% in the previous three months when lockdowns were imposed to curb the initial coronavirus wave.
“The economy continues the momentum achieved in the third quarter in production, consumption and investment,” Ağbal said.
Turkey has seen a growth of 0.3% this year but has said a contraction of 1.5% is possible under a worst-case scenario. It projects a rebound of 5.8% in 2021.
Ağbal noted that the level of growth in 2021 will largely be shaped around the base effect of growth in 2020, noting that the global economy, which contracted sharply this year, will recover next year. Yet, he warned about downside risks depending on the course of the coronavirus pandemic.
During this period, global inflation and commodity prices will also improve depending on the course of the outbreak, he added.
In terms of spending, Ağbal said the growth was largely caused by domestic demand, noting that the contribution of net exports is at low levels due to the weak course of tourism.
Recovery in tourism
Separately, Culture and Tourism Minister Mehmet Nuri Ersoy suggested that Turkey would be the fastest recovering nation next year in the tourism sector.
Addressing Turkey’s Innovation Week held virtually by the Turkish Exporters’ Assembly (TIM), Ersoy said the country performed better than its rivals in 2020 during the pandemic, built trust globally and became the most preferred country for several markets such as Russia and Ukraine.
With the safe tourism certificate program, Turkey took significant measures against the pandemic in the tourism field for protecting both foreign visitors and employees in the sector, he recalled.
Recalling that Turkey completed 2018 and 2019 with record figures in the tourism area, Ersoy said tourism is the most valuable sector for generating income and employment.
Turkey ranked in the 26th place among global services exporters, he said, adding, “We should focus on how we will become among the top 10 countries.”
Turkey should be innovative to increase its share from global services exports, he underlined.
Ağbal further suggested that the deferred demand has come into action rapidly, supported by strong credit acceleration, adding that private consumption expenditures and investment expenditures saw a noteworthy increase.
"Therefore, the recovery and strong momentum of the economy on the production, consumption and investment side continues in the fourth quarter," Ağbal noted.