Turkish Central Bank vows tight policy, warns about risks

ANKARA

Central Bank Governor Murat Çetinkaya

The Central Bank, which has been taking measures to defend the Turkish Lira, said in the minutes of a crucial May 23 Monetary Policy Committee meeting that it will maintain a tight policy amid highlighting geopolitical risks.

“The tight stance in monetary policy will be maintained decisively until the inflation outlook displays a significant improvement and becomes consistent with the targets,” read the notes released on May 30.

The Central Bank had raised the late liquidity window lending rate from 13.5 to 16.5 percent to stop lira’s slide against the lira.

The Turkish currency hit the record low of 4.92 against dollar on May 23, with a daily decline of 5 percent, but later it regained some of its losses after the Bank meeting.

The lira kept surging this week after the Central Bank announced on May 28 that it had decided to complete a simplification process for the operational framework of its monetary policy.

The minutes also read that “fluctuating global financial markets have a tightening effect on domestic financial conditions. Due to geopolitical developments accompanied by prospects for macro indicators such as inflation and the current account deficit, Turkey grew more sensitive against global fluctuations. 

“Financial conditions have recently tightened in advanced economies. The probability of an accelerated inflation due to brisk demand conditions and rising commodity prices constitutes a risk of triggering a faster-than-projected tightening in monetary policies of these countries,” it said, also noting that the U.S. Federal Reserve is more likely to implement three more policy rate hikes in the remainder of 2018, and the U.S. bond returns have increased.

“Due to higher risk premium and lower portfolio flows, the depreciation and volatility in the lira was higher compared to the currencies of other emerging economies. The depreciation trend in the lira has gained pace since the third week of May and signaled for unhealthy price formations inconsistent with economic fundamentals,” the Bank stated.

The lira weakened on May 31 by 0.3 percent, retreating from the near two-week highs reached on May 30 in the wake of the emergency measures.