Turkey needs tighter monetary policy to bring inflation back to its 5% target in the medium term, the International Monetary Fund (IMF) said yesterday after an official visit.
The IMF also said Turkey’s monetary policy framework needs to be improved to strengthen its effectiveness, saying the central bank needs to narrow its interest rate band and provide liquidity at a single policy rate.
The IMF’s comments, released in a statement following a staff visit to Turkey that ended on Monday, echo longstanding concerns from investors and economists, who say the central bank desperately needs to lift interest rates to cool inflation, which hit 8.8% in December.
Turkey’s central bank has kept its benchmark rate on hold since early last year, sparking concern it is bowing to political pressure to keep rates low. President Tayyip Erdogan has frequently railed against the high cost of credit.
“A tighter monetary policy stance is needed to bring inflation back to the 5% target in the medium term. Inflation remains well above target and has started to increase recently,” the IMF said. “Narrowing the interest rate band and providing all liquidity demanded by the market at a single policy rate will provide a clear signal on the policy stance.”
At present, Turkey’s central bank uses an interest rate “corridor” of multiple rates to set policy. Central Bank Governor Erdem Basci said last month it was too early for Turkey to abandon its use of a wide rate corridor.
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