IMF Advises Turkey to Tighten Monetary Policy

The International Monetary Fund advised Turkey to tighten monetary policy to address sharp lira depreciation, contain high inflation, and counteract intensifying external pressures.

Concluding the 2017 Article IV Consultation with Turkey, the IMF said the economy is set to grow below potential in 2016-18, RTT reported.

The lender projected gross domestic product to grow 2.7% in 2016 and 2.9% in 2017 with considerable downward risks. Over the medium-term, growth is projected to be at around 3.5%, unchanged from previous estimates, but internal and external imbalances are expected to persist, the IMF said.

According to the IMF, domestic political turmoil, uncertain future of EU-Turkey relations, tensions in the southeast regions, coupled with military involvement in neighboring countries are set to weigh on domestic demand.

The IMF noted that political uncertainty after the failed coup attempt and a less favorable external environment are weakening the lira and increasing the cost of external financing.

IMF welcomed the authorities’ measure to simplify the monetary policy framework. IMF directors also recommended the authorities rebuild international reserve buffers as conditions permit.

Further, the lender encouraged the authorities to intensify the pace of structural reforms to promote economic rebalancing and boost productivity.

The Turkish lira has slumped 5% against the dollar since the start of the year after the currency lost one-fifth of its value per dollar last year. With the currency under pressure since the state of emergency called in the aftermath of the failed coup attempt, the central bank has largely refrained from pushing for a rate increase, while the government has advocated for lower interest rates to boost economic growth. Instead, the central bank recently announced a series of measures to support the currency by canceling its regular one-week repo auctions and forcing the banks to borrow at a higher cost through its late liquidity window facility, a move seen as a backdoor tightening by investors.

The central bank kept its one-week repo rate steady at 8% at its monetary policy committee meeting on Jan. 24. Instead, it raised its overnight lending rate to 9.25% from 8.5%, and held its borrowing rate at 7.25%. In addition, the central bank raised the late liquidity window lending rate to 11% from 10%.

The central bank raised its 2017 inflation forecast to 8% from 6.5% and its 2018 inflation forecast to 6% from 5%, Gov. Murat Cetinkaya said Tuesday.