Turkish CBank: Tight, decisive monetary stance set to stem inflation

Turkey's Central Bank governor on Wednesday said the risk of upward inflation will require a tight and decisive monetary policy stance in 2021, adding that it will be tightened if needed.

"We consider it important to raise awareness of the costs our economy and country incur due to inflation," Naci Agbal told economists and reporters at a videoconference on next year's monetary and exchange rate policies.


Monetary policy decisions will be taken by giving priority to price stability, he stressed.

An annual inflation target of 9.4% for end-2021 is the Central Bank's intermediate target, noted the governor, adding that the bank is sticking to the government target of 5% in the medium term.

"Aware of its responsibility in reaching this target (5%), the CBRT will remain determined and resolute over the target horizon," he noted.

Agbal said monetary policy will be adopted in a simple and understandable framework next year.

Stressing that one-week repo auction rate is the main policy instrument of the bank, Agbal said: "The interest rate corridor that is used to limit intraday volatility in overnight interest rates and the Late Liquidity Window that performs the CBRT 's role as a lender of last resort will not be utilized as monetary policy instruments except for their above-mentioned functions."


On Nov 19, the bank announced that it decided to start providing funding via quantity repo auctions with one-week maturity, in order to simplify the operational framework of monetary policy.

The governor stressed the effective use of reserve requirements and other liquidity instruments to ensure the smooth functioning of the monetary transmission mechanism and to limit the risks to macrofinancial stability.

He also noted that the bank will not buy or sell foreign currency to determine the level or direction of exchange rates.

"The implementation of the floating exchange rate regime will continue, and exchange rates will be determined by supply and demand balance under free market conditions," he said, adding the bank has no exchange rate target.


Touching on the bank's foreign exchange reserves, Agbal said official reserves will be strengthened and relevant tools will be used to this end under appropriate conditions in a transparent way and within a specific framework.

The governor highlighted that the bank will continue swap transactions to contribute to foreign exchange and liquidity management of lenders.

"However, it is predicted that the use of swap facilities provided to lenders may gradually decrease during the year according to market conditions," Agbal said, adding: "This has an importance in terms of transforming the balance sheet structure of the CBRT into a more sound structure."


Turkey's year-end inflation rate is expected to hit 12.1% for 2020, according to the bank, while under Turkey's new economic program for 2021-2023, the country's inflation rate target for this year is 10.5%.

The bank forecasts annual inflation for next year to hit 9.4% before stabilizing to around 5% in the medium term.

Turkey posted a 14.03% annual hike in consumer prices in November, according to TurkStat, the country's statistical authority.

In a move hailed by markets, Turkey's Central Bank last month raised its one-week repo rate-also known as its policy rate-from 10.25% to 15%, tightening its monetary policy to ensure price stability.

The move also came amid changes in Turkey's economic administration and pledges of reform.