BAKU, Azerbaijan, December 6. Türkiye’s exchange rate policy should focus on smoothing excessive volatility that could dislodge inflation expectations, TurkicWorld reports citing the International Monetary Fund (IMF).
"Foreign exchange intervention (FXI) has helped smooth lira volatility and respond to shocks that could destabilize inflation, but a sustained period of lira strength will eventually raise the risk of overvaluation and sudden adjustments. Macro adjustment aimed at bringing down inflation will reduce the need for FXI by helping reanchor inflation expectations. As this occurs and as reserve buffers recover, greater lira flexibility should be allowed. If high rates attract speculative inflows, reserve accumulation ceilings can add volatility, reduce carry trade attractiveness, and strengthen buffers," reads the latest IMF report.
Meanwhile, IMF analysts believe that achieving the Central Bank’s (CBRT) inflation targets requires higher real rates, complemented by a framework firmly centered on the policy rate.
"Sequential inflation above levels consistent with CBRT’s targets, still-strong credit growth, and resilient aggregate demand warrant a higher real policy rate trajectory. This could be achieved by returning the policy rate to mid-2025 levels and postponing rate cuts until sequential inflation is consistent with CBRT targets. Dedollarization targets weaken interest rate transmission and credit growth ceilings distort bank portfolios, including by exempting credit cards, which have boosted consumption growth and inflation. They should be phased out before reducing the policy rate," the report says.
IMF experts point out that going forward, communication should aim at clearly explaining triggers for rate action. This will help to reanchor expectations.
"Reforms to protect central bank independence would also improve policy predictability and credibility," reads the report.
