IMF Says Turkey’s Central Bank Should Focus on Inflation Control

The Turkish central bank should be more focused on meeting its inflation target because its multiple monetary policy tools are “blurring signals,” the International Monetary Fund staff said.

While the monetary policy framework put into place by Central Bank Governor Erdem Basci aims to achieve both price and financial stability, inflation has remained “well above target,” IMF economists said in an annual assessment of the country’s economic policy dated Oct. 31 and released yesterday. It recommended a return to “a more conventional framework.”

“The new framework, relying on a battery of novel instruments to gain degrees of freedom in segmenting domestic and international interest rates, has not yet proved its superiority,” the IMF wrote.

Monetary policy in Turkey has been led in a way the IMF said in the report is “unconventional,” relying on a variety of instruments instead of one interest rate in an attempt to stem capital inflows. The bank forecast Oct. 24 that inflation will reach 7.4 percent by the end of the year. Its target is 5 percent.

“It is the ability to achieve the inflation target and anchor expectations that ultimately determines the success of monetary policy, and so far inflation has remained well above the target,” the report said. “While the new instruments may each seem appealing, as a whole, they are blurring policy signals and may be weakening the monetary transmission mechanism.”

To contact the reporters on this story: David Neylan in Ankara at dneylan1@bloomberg.net; Sandrine Rastello in Washington at srastello@bloomberg.net

To contact the editors responsible for this story: Andrew J. Barden at barden@bloomberg.net; Chris Wellisz at cwellisz@bloomberg.net

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