Turkey will need to tighten monetary policy in order to meet its inflation target next year, preferably by raising interest rates, the IMF said on Thursday, based on its year-end inflation forecasts of 8.5 percent for 2011 and 5.75 percent for 2012.
The Turkish central bank has an inflation target of 5.5 percent for end-2011, while consumer price inflation ran at 6.65 percent year-on-year in August. The Turkish central bank's inflation target for end-2012 remains at 5 percent.
"Our current inflation forecasts (8.5 percent for end 2011 and 5.75 percent for end 2012), indicate that some tightening would be needed to achieve the target for next year," the International Monetary Fund said. The comments were among the preliminary conclusions of the Fund's Article IV consultations, posted on its website. "With the expectation of somewhat lower global risk appetite ... this tightening would best be delivered through an increase in the policy rate," the IMF added.
In December last year, the Turkish central bank shifted its priority from price stability to financial stability due to a soaring current account deficit, and adopted a new policy mix. Under this framework, the bank has reduced its policy rate by 125 basis points to its current 5.75 percent level to deter hot money inflows while raising banks' reserve requirement ratios to curb loan growth and dampen rampant domestic demand.
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