Turkey sticks to 5 percent inflation target

Inflation remains one of the most pressing problems for Turkey's economy after it weathered a currency crisis earlier this year.

ISTANBUL - Turkey's central bank said on Wednesday it would stick with a 5 percent inflation target, a deeply ambitious goal after this year's currency crisis sent the inflation rate soaring to a 15-year high of 25 percent.

The bank said it would change its monetary policy stance if exchange rate moves had a lasting affect on price stability, helping the lira gain nearly 1 percent against the dollar.

It also stressed coordination with government policy in fighting inflation, saying its first objective was to bring down inflation to single digits, and then gradually reduce it and stabilise it at around 5 percent.

Inflation remains one of the most pressing problems for Turkey's economy, after it weathered a currency crisis earlier this year. Investor concerns about the bank's ability to rein in prices - and a diplomatic rift with the United States - sent the lira tumbling as much as 47 percent. It has since recovered somewhat but is still down some 30 percent, year-to-date.

"If exchange rate movements permanently affect price stability, the CBRT will change its monetary policy stance and give the necessary reaction," it said in its 2019 monetary and exchange rate policy document, released on Wednesday.

The lira firmed to 5.3390 to the dollar from 5.3843 on Tuesday, when it was hit by concerns about potential premature monetary policy easing after a lira rebound and tax cuts helped push inflation below 22 percent.

"The central bank's stress on a monetary policy focused on inflation seriously reduced selling pressure on the lira, indeed reversing it," said a treasury desk trader at one bank, adding an early rate cut had, in recent days, begun to be priced in.

"This text does not contain any comments pointing towards the Dec. 13 MPC (monetary policy committee meeting) but it is important in showing it may make a similar assessment at the MPC stressing inflation," the trader said.

Monetary, fiscal policy coordination

The currency sell-off has driven up the prices of everything from food to fuel, and has deepened worries about the broader impact on the real economy and banks. Inflation was at 21.6 percent last month, near its highest in a decade and a half.

"The inflation target has been kept at 5 percent as per the agreement reached with the government," the bank said.

"Fiscal discipline is essential in fighting inflation. The coordination between monetary policy and fiscal policy is therefore crucial with respect to disinflation and macroeconomic rebalancing," the bank said.

Finance Minister Berat Albayrak has stressed the importance of coordination between fiscal and monetary discipline in fighting inflation, although economists have said the financial markets would be more convinced by stronger messages to guarantee the bank's independence.

Much of the lira sell-off was sparked by comments from President Tayyip Erdogan, a self-described "enemy of interest rates", who has repeatedly called for lower borrowing costs.