Turkey has ‘no fear’ of a Fed rate hike: Central Bank head

ANKARA

Central Bank Governor Erdem Başçı said Turkey has no fear of a planned interest rate hike by the U.S. Federal Reserve (Fed) and the bank is ready for normalization. 

“Turkey has no need to fear a Fed rate hike, which could come in September as the Fed’s communications are very positive and the Turkish Central Bank has taken the required measures. Finally, we’ll overcome any concerns, if any, with the simplification document in our rate policy,” he said at a meeting to announcing the bank’s quarterly inflation report on July 30. 

Başçı said the bank was carrying out technical work to assess the impact of monetary policy based on a single interest rate and may review its policy framework if circumstances require. It may also review its reserve option mechanism.

He added the reserve rations paid to Turkish banks may be increased up to the Fed level. 

Başçı signaled at possible moves to simplify monetary policy in a scenario in which fluctuations in the long-term rates slow down permanently after normalization process starts in global money markets. 

“In this base-scenario, the need for a wider rate corridor will also decrease in Turkey as well. We’ll then consider simplifying the operational framework of the rate policy in a gradual manner,” he said. 

This will be a technical work and the details of the document will be shared in the coming weeks, he said. 
“Nobody should expect an early loosening or excessive tightening from us. We will go to the August meeting with plans for moderate tightening,” Başçı said.

The Central Bank slightly raised its inflation forecast for the end of 2015 and said it expected moderate economic growth in the second half, along with an improvement in the current account deficit.

Başçı said the bank’s mid-point year-end inflation forecast now stood at 6.9 percent, up from 6.8 percent in its last report. It left its 2016 mid-point forecast at 5.5 percent.

He forecast inflation below 7 percent this month, with a decline in food prices contributing positively to the inflation outlook, but that keeping it there would require a joint effort by economic policymakers and not just the Central Bank.

“Inflation will keep falling until September and then fluctuate until the end of the year,” he said. 

Başçı said that the loss in the Turkish Lira’s value against the dollar has delayed improvement in inflation.

Domestic consumption in Turkey is rising moderately, and not on the basis of consumer credit, Başçı pointed out.  

Başçı said Turkey’s exports to the European Union have been increasing, but the bank has been closely following the possible effects of the geopolitical risks over exports. 

He noted that Turkey would close the year with growth rates that may be lower than the previous targets, but in a positive manner. 

“Moderate growth will continue in the second half. The demand conditions will support the consumer index. Improvement in the current account gap will continue, but the foreign demand will limit the improvement,” he said, adding the bank is down in its average oil price assumptions.