The bank explains why inflation diverged from the target.

01.02.2022 – 15:01

The Central Bank of Turkey sent the government an open letter on Monday to explain why inflation diverged from its target and the measures to reach its goals concerning prices.

“Instead of focusing on short-lived immediate gains, the CBRT (Central Bank of the Republic of Turkey) has initiated a comprehensive monetary policy review process to achieve sustainable and permanent price stability in the long run,” the bank said in the letter, attaching its routine inflation report which it said “explains the reasons for the significant deviation of inflation from the targeted path.”

The bank had adopted a medium-term inflation target of 5%, yet the latest data from the Turkish Statistical Institute (TurkStat) showed the country’s annual inflation rate was 36.08% in 2021.

Underlining that it is currently conducting a “comprehensive monetary policy review” to achieve permanent price stability, the banks said a strategy it adopted to boost use of the Turkish lira in the country — “liraization” — would be “the most crucial part of this process,”

Liraization will back up monetary policy instruments in the medium- and long-term fight against inflation, added the bank, noting that it would pursue this via three channels,

The first of these will be to encourage Turkish lira savings through FX-protected accounts and similar tools. Returns on such accounts “will not be allowed to remain lower than their alternatives,” it emphasized.

FX-protected accounts and reserve requirements are expected to “provide a lasting contribution to price stability in the medium term” under the liraization process, it added.

Turkey’s government has recently introduced a new mechanism to compensate lira depositors for foreign currency fluctuations.

The new FX-protected Turkish lira deposit tools will be available for people who have a lira deposit account with a maturity of three, six, nine or 12 months.

Under the facility, if the yield remains below the exchange rate, the government has pledged to pay the difference between the value of savings in lira and equivalent dollar deposits.

“Secondly, the transition to Turkish lira instruments for CBRT liquidity and provisioning operations will be carried out progressively,” said the bank, adding that it would reduce the share of currency swap transactions in total funding.

“In accessing Turkish lira, priority will be given to Turkish lira-denominated collaterals and instruments. We will also incorporate this principle into reserve requirement policies,” it noted.

The bank also vowed to minimize dependence on external loans to finance production.

“It is important to meet funding needs of sectors that support the current account balance and engage in foreign exchange earning activities at suitable maturities in Turkish lira terms,” it said.

It added that fiscal policy is also expected to “have a high contribution to the fight against inflation.”

Annual inflation is projected to hit 23.2% in Turkey by the end of this year, according to the bank’s first quarterly inflation report this year.