IMF worries over Turkey's "overburdened" monetary policy

By bne IntelliNews January 30, 2012

bne -

Turkey's monetary policy is "overburdened" according to the International Monetary Fund, which calls for the country to lower its inflation target, raise its benchmark policy rate and make monetary policy more transparent in a bid to deliver a "soft landing."

The IMF released its annual assessment of the country's economic policy on January 28, in which it adds to the continued concern over Turkey's much maligned twin benchmark rate system. The Washington-based lender worries over "...what can be done to deliver a soft landing? What policies can reduce the propensity for future boom-bust cycles?"

The answer, it suggests, is for a single benchmark at a higher rate. Along with a more ambitious inflation target, this will help clear up the confusion that "overburdens" monetary policy thus "limit[ing] the risk of capital reversal, and hence help achieve a soft landing," the IMF analysts argue.

Turkey's central bank has said it sees a 5% inflation target as suitable. However, decreasing the inflation rate will help with the country's competitiveness, stresses the IMF.

Whilst it lauded the achievements of the Turkish economy in recent years, the IMF stressed that the economy maintains its tendency for boom and bust, and said that the risks are rising. In report for G20 leaders who met January 19-20, the IMF forecasted growth of just 0.4% growth in 2012.

"Staff advocated a much tighter structural fiscal position and financial policies geared to moderating systemic risk," reads the IMF report. That would "allow monetary policy to maintain both inflation and interest rates at levels similar to other emerging markets within a conventional inflation-targeting framework."

Current monetary policy involves a record low 5.75% benchmark, but mixes it with an overnight lending rate at 12.5%. Lending rates can slide between the two as the central bank sees fit, and often do - a policy that has confused investors and raised concerns about transparency.

"Since the policy was introduced in late October, overnight interbank rates jumped to around 9.75% on average, with considerable day-to-day variability," read the IMF report. "This was accompanied by only a modest reduction in lira liquidity as banks' demand for precautionary balances increased in response to the greater uncertainty inherent in the new system."

The policy has been the been the focus of international criticism for months. Government supporters have accused a vague coalition of analysts and journalists of being an "interest rate lobby" that aims to make Turkey raise its rates to increase the profits of international investors.

In a recent move also intended to quell concern over an alleged lack of independence from the government, Turkey's Central Bank Governor Erdem Basci has sought to dispel such conspiracies in recent weeks.

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