Turkish Central Bank Governor: Decisive Tight Policy Contains Re-dollarization Risks
Turkish central bank governor Fatih Karahan said that monetary policy has been proactive and that re-dollarization risks are contained by a decisive tight policy stance, with retail FX demand more limited compared to March 2024.
In the text of a presentation which he made in Washington on Wednesday, Karahan said monetary policy transmission has improved considerably over the last year and that disinflation is continuing, "but risks are alive".
The bank hiked its main policy rate to 46% from 42.5% and lifted the overnight lending rate to 49% last Thursday. The move reversed an easing cycle in response to market turmoil triggered by the arrest of Istanbul's mayor last month, Reuters reported.
The tight monetary stance will be maintained until price stability is achieved via a sustained decline in inflation, Karahan said in the presentation on Wednesday.
The decisiveness regarding tight monetary stance is strengthening the disinflation process, he said.
Karahan said the pass-through effect on inflation of a weaker currency is modest, reflecting improvement in pricing behaviour, while falling oil prices support disinflation, but the global economic outlook is uncertain.
He also said demand has exceeded expectations, driven by goods consumption.
He said currency pass-through is expected to be around 35-40%, considerably lower than that during the summer of 2023, declining amid lower forex-protected KKM account balances, improved inflation expectations and moderating demand.
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