IMF recommends Turkey to hike policy rate, liberate central bank

IMF recommends Turkey to hike policy rate, liberate central bank
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IMF said policy rate cuts in late-2021 added to existing vulnerabilities in Turkey and were followed by lira depreciation and high inflation

Turkey should tighten monetary policy and give its central bank more independence, a mission from the International Monetary Fund (IMF) said on Friday.

An IMF mission visited last month to discuss monetary policies and economic performance of Turkey and met with several high ranking Turkish officials from public and private institutions, a statement by the IMF said. 

IMF said policy rate cuts in late-2021 added to existing vulnerabilities in Turkey and were followed by lira depreciation and high inflation. 

“To address Turkey’s challenges, the mission recommended early policy rate hikes accompanied by moves to strengthen the central bank’s independence. Such moves would help reduce inflation more durably and allow reserve buffers to be rebuilt over time. Tight fiscal policy would also help, given rising fiscal risks and high inflation, with provision made for targeted assistance to the vulnerable,” the statement said. 

Foreign exchange reserves have dropped sharply in recent years due to market interventions and in the wake of a currency crisis in December. In the last three months, the central bank has cut its policy rate by a total of 350 basis points to 10.5%, while another cut is expected this month as President Tayyip Erdogan called for single-digit interest rates by year-end.

Annual inflation rose in October to a 24 year high 85.5% while the lira, down 44% to the dollar last year, has lost another 29% so far this year.