Too early for Turkey to abandon wide rate corridor: Central Bank

DAVOS

It is too early for Turkey to abandon its use of a wide interest rate corridor in setting monetary policy, Central Bank Gov. Erdem Başçı said on Jan. 21, batting back investor hopes the bank would soon simplify its system of using multiple rates. 

“We have decided it is too early for Turkey to abandon a wide interest rate corridor at this stage. We first considered whether the normalization process of the U.S. Federal Reserve’s [Fed] rate policy runs in an unproblematic manner. We saw the process has been running well, but global fluctuations have been quite high mainly due to problems in China. In this vein, we decided it would be better to preserve our flexibility in the last rate decision making meeting. We do this in every meeting,” he said in an interview with Bloomberg HT television on the sidelines of the World Economic Forum in Davos. 

The Central Bank left its main interest rate unchanged at 7.5 percent for the 11th straight month on Jan. 19, ranging from the overnight borrowing rate of 7.25 percent to the 10.75 percent overnight lending rate, in a widely expected move. The bank had previously hinted that it would raise rates in tandem with the Fed.

Başçı said the Central Bank may engage in simplification in monetary policy if global economic problems are resolved or everyone agrees on how effective its other tools are.  

He noted the bank needed to make everyone believe the inflation rate will start to decline in Turkey and the country will close the year with around 7.5 percent. 

“We’ll also make the required steps… We have different tools in our hands. The Central Bank always takes the required steps when needed… We need to work this year to decrease the inflation rate with high determination,” he said. 

Turkey closed last year with an inflation rate of around 8.8 percent, hitting higher-than-targeted for the fifth year.