2012 test for Turkish Central Bank, says governor

ISTANBUL - Hürriyet Daily News

The Central Bank will never allow a deterioration in price stability, says Central Bank Gov Başçı. AA photo

This year will be a credibility test for the Central Bank, said Governor Erdem Başçı, adding that Turkey is ready to boost growth with its domestic dynamics, which was the reason the Central Bank has mainly maintained a tight monetary policy.

The Central Bank prefers its monetary policy remains tight and will not allow deterioration in price stability, the governor said May 18 at a meeting organized by the Turkish Exporters’ Assembly (TİM) in Istanbul.

The bank is confident that year-end inflation will be at 6.5 percent and would prefer the Turkish Lira remain a “strong currency,” Başçı said. “The relative value of the lira will continue to be better than other currencies because the Turkish Central Bank thinks this will be right for price stability,” he said.

Since its monthly policy meeting in March, the Central Bank has adopted a hawkish stance to curb inflation, last running at an annual rate of 11.1 percent, its highest since 2008 and way above the bank’s year-end target of 5 percent.

Başçı also said Turkey could easily see annual inflation at around 8 percent in May due to a sharp decline, but forecasted it will rise again in the June-to-August period.

“We will try to restrain the rise in inflation, thus we are sensitive to [foreign exchange market] rates,” he said. 

Since late 2010 the Central Bank has applied an unorthodox policy mix based on daily liquidity management, a low policy rate and an active interest rate corridor – the gap between its overnight borrowing and lending rates – to deter short-term capital inflows and help tackle high inflation and a huge current account deficit.

However, this complex policy contributed to excessive weakness in the lira by increasing market uncertainty, causing the lira to loose some 20 percent compared to the dollar in 2011.

“The Central Bank will never allow a deterioration in price stability. It will do what is necessary when it is necessary,” Başçı said, possibly implying further support for the lira. k HDN