Turkey may need to hike rates, should avoid premature easing, IMF says

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Turkey’s central bank may need to increase its benchmark interest rate should inflation expectations fail to stabilise, the International Monetary Fund said in an annual review of the country’s economy.

The central bank, which has raised rates sharply to stabilise the lira and rein in inflation, should avoid any premature monetary easing to better anchor inflation expectations, address dollarisation and sustain capital inflows, the IMF said on Monday.

“These actions would pave the way for a stronger lira and higher reserves, especially when combined with broader reforms, including steps to underpin central bank independence,” it said.

The Turkish central bank has hiked rates to 17 percent from 8.25 percent since September to tame inflation and arrest losses for the lira, which slumped to a record low in early November. This month, Turkish President Recep Tayyip Erdoğan called for lower interest rates, saying high borrowing costs were shackling the nation’s firms financially. Annual inflation in the country stands at 14.6 percent.

Turkey’s government could also introduce focused fiscal support for the economy that is targeted and temporary, the IMF said. Combined with firm monetary policy, that would “achieve a broadly neutral, but better calibrated policy stance”, it said.

“Such an adjustment would help rebuild credibility and buffers, while also responding to the human and economic needs arising from the pandemic,” the Washington-based fund said.

Turkey’s economy may grow by an annual 6 percent this year, thanks to the roll out of the COVID-19 vaccine, recovery in the economic growth of trading partners and large positive carryover from 2020, the IMF said. The annual expansion will then settle back to a trend of about 3.5 percent, it said.

The IMF said the Turkish authorities should incentivise the recognition of loan losses at the nation’s banks and encourage them to phase out loan restructurings and payment deferrals to allow for debt restructuring.

“As the economy recovers from the pandemic, a comprehensive third-party asset quality review, and ensuing stress tests, would strengthen confidence and help develop the market for distressed assets,” the IMF said.

It said delays to proposed legal revisions to strengthen the independence of the country’s banking regulator should also be avoided.

Credit provided through the nation’s Credit Guarantee Fund (CGF) was expanded beyond small and medium-sized enterprises (SMEs) during the pandemic, but going forward such financial aid should be limited to SMEs, in line with the CGF’s original mandate, the IMF said.

The Turkish authorities should also carefully define and monitor the scope and role of extra-budgetary funds and other non-government entities, with the maximum degree of transparency and strong governance, the IMF said.

Consequently, the governance structure of the Turkey Wealth Fund could also be refined to limit potential conflicts of interest, it said. The fund, which controls Turkey’s biggest state-run banks and other enterprises, is chaired by Erdoğan.

Ahval

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