Tight monetary stance to continue: Turkish Central Bank

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Turkey’s tight monetary policy stance will continue to score significant improvements in the country’s inflation dynamics, the Central Bank governor said on Feb. 14.

In an exclusive interview with Anadolu Agency, Murat Çetinkaya spoke about recent developments in the global economy, the bank’s monetary policy stance, recent dramatic improvements in the country’s current account balance financial stability, and inflation.

How do you assess recent developments in the global economy? How important is the role of global developments in designing the current policyframework?

Global developments affect the economy through various channels, particularly finance and trade. Recently, financial markets have been relatively calm; nevertheless, the 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.

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 policycoordination is crucial. The recent policy mix is a reflection of this awareness. We believe that the most important contribution of the Central Bank of Turkey to this process will be to maintain the focus on price stability.

In your presentation at the latest Inflation Report Briefing, you stated that the Central Bank will maintain its tight monetary policy stance until the inflation outlook shows “significant improvement.” How should we interpret this statement?

We have to see a sustained improvement in the indicators related to the underlying trend of inflation and overall pricing behavior. That means that one-off base effects or external cost factors leading to a change in relative prices would not be enough to declare a “significant improvement.” We have to observe simultaneous improvements in various trend indicators and pricing behavior.

In this context, with a forward-looking perspective, we closely monitor micro-data on pricing behavior and expectations formation. Achieving a significant decline in inflation over a short period is crucial for an improvement in expectations and pricing behavior. Establishing the monetary policy framework and the policy stance with this determination will surely contribute to the disinflation process through the expectations channel.

We’re seeing differing views on the course of economic activity in the current context. What’s your assessment of the potential growth of the economy and developments in the economic activity in the upcoming period?

In addressing the concept of potential growth, we need to differentiate between short-term cyclical developments and long-term structural dynamics. The recent deceleration in the economy largely reflects cyclical developments. It’s important first to maintain the rebalancing process through coordinated policies, and then to support this process by structural policies that will bring lasting improvement. Recent steps reflect this perspective. The ongoing efforts in structural areas will support a stable and sustainable growth path.

What’s your evaluation of the relation between the monetary policy stance and economic activity?

The determined stance towards price stability supports balanced growth in the current conditions. The coordinated policies implemented to reduce inflation uncertainty have contributed to the decline in risk premium, thus improving Turkish lira-denominated stable funding facilities, and lower long-term interest rates. This, in turn, supports the recovery in economic activity and investments.

The decisive monetary policy stance has supported the 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.

In the days ahead, can we expect steps from the Central Bank on financial stability? How should we interpret the interaction of these steps with the monetary policy?

A sound functioning of the financial system is key to the effectiveness of monetary policy. We assess that, in the current context, maintaining a strong focus on price stability improves predictability and supports financial stability. Effective functioning of financial intermediation is important in terms of both monetary transmission mechanisms and a balanced and efficient distribution of resources.

Accordingly, the Central Bank employs its liquidity and reserve requirement tools when needed. In this sense, we think that the various steps taken last year proved effective in alleviating market volatility and strengthening the transmission mechanism.

In view of cyclical conditions, liquidity steps can be taken to support financial stability. These tools and associated steps do not give a direct signal with respect to the monetary policystance. It would be more appropriate to evaluate liquidity-related practices within the context of financial transmission. Our stance on monetary policy is clear; the tight stance will be maintained until we observe a significant improvement in inflation dynamics.

How do you see the rapid correction in the current account balance?

We’ve been observing a rapid contraction in the current account deficit since the economic rebalancing became evident by mid-2018. Part of the correction in the current account balance is due to the economic slowdown. However, it should be emphasized that the strong course of exports and tourism revenues has also supported the rebalancing process in the recent period. In other words, the improvement can’t be solely attributed to weak domestic demand.

Supporting the improvement in the current account balance with structural measures will contribute to balanced growth and price stability in the long run. In particular, structural steps to boost productivity and competitiveness are important. Reinforcing savings and financial awareness is critical to ensuring a lasting improvement in the current account balance. Moreover, macro-prudential measures encouraging prudent borrowing would support this process. Looking ahead, we will maintain our efforts to ensure further focus on these issues.

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