The Central Bank of Turkey announced this year’s third inflation report on Thursday, raising its year-end inflation forecast slightly to 6.9 percent from 6.8 percent. Central Bank governor Erdem Basci said he expected the Turkish economy to grow moderately in the second half of this year however, signalled growth rate might stay below the government’s medium-term programme forecast of 4 percent. Basci also said he expected an improvement in the current account deficit this year.
Although the central bank governor said “cautious monetary policies” would remain until desired levels in inflation are reached, Basci signalled the bank might evaluate simplifying its framework of interest rate policy.
Often criticised by both local and foreign investors for being too complicated, Turkey has an interest rate corridor system, which is the gap between the Central Bank’s overnight lending and borrowing rates. The gap ranges between 7.25 to 10.75 percent, while the one-week repo rate is at 7.50 percent.
According to Basci, the three separate interest rates were introduced as a flexibility tool to cope with volatility during uncertain times. However, he said the bank was looking into possibilities with a single interest rate monetary policy, adding it may review its tolls if necessary.
The Central Bank governor emphasised that such a policy shift would come before the US Federal Reserve’s potential rate hike in September. The Fed is planning to hike its interest rates for the first time since nine years and there are fears about a sudden reversal of capital inflows to emerging markets.
However Basci said “Turkey has no need to fear” a potential rate increase by the Fed, adding the bank has the necessary tools to take measures, such as a hike in reserve requirements for the banks.