Washington: The International Monetary Fund warned Turkey on Tuesday of inflation risks that could damage overall growth in the economy. In a generally positive report following regular consultations with Turkish authorities, IMF executive board members praised them “for setting the stage for more sustainable and balanced growth in 2012, accompanied by declines in the current account deficit and inflation”.
But the IMF directors noted that Turkish inflation remained above target and inflation expectations were still elevated.
“Directors recommended that the central bank adopt a more forward-looking monetary policy stance and closely monitor developments in domestic demand, wages, and capital flows,” the IMF said in a statement after the Article IV consultations.
Many directors suggested that the central bank return to an interest rate policy under a conventional inflation-targeting framework. Still, a number of them thought that, in the current environment of volatile capital flows, the more flexible policy framework had served the Turkish economy well.
“In order to manage risks from excessive short-term capital inflows, many directors saw scope for greater use of sterilised intervention, given the relatively low level of international reserves, complemented with macro-prudential measures,” the IMF said.
In sterilised intervention, monetary authorities counter unfavourable foreign-exchange rates by offsetting the purchase or sale of domestic assets.
The IMF projected Turkish inflation would fall to 7.5 per cent by the end of 2012, from 10.4 per cent in 2011, and decline to 6.2 per cent in 2013.
After gross domestic product growth surged 8.5 per cent last year, GDP was expected to expand 3.0 per cent in 2012 and 3.5 per cent in 2013.
Directors noted that the outlook was “clouded by external uncertainties, and that Turkey remains vulnerable to shifts in market sentiment, given the country’s still large external financing needs”.
In March 2010, Turkish Prime Minister Recep Tayyip Erdogan refused IMF aid following two years of negotiation with the Washington-based institution.