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Naci Ağbal

Governor of the Central Bank of the Republic of Turkey

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Confidence, which is the sole element that holds the society together, also lies at the root of a strong economy. In a reliable economy, expectations improve, investments and employment increase, and the society prospers.

Confidence is also a crucial element for central banks that are among the key institutions of economic management. When the monetary policy is reliable, its effectiveness and power to improve expectations increase. In this respect, the first step that a central bank should take to achieve its objective is to ensure that economic agents have confidence in monetary policy. A central bank that successfully fulfills its mandate opens the door to a stable and productive economy. All in all, a credible monetary policy that is focused on price stability is one of the keys to social welfare in the long run.

Our key priority at the Central Bank of the Republic of Turkey is to achieve our primary mandate of price stability and ensure that it lasts permanently. We are working and will continue to work with full force to achieve this objective through a reliable monetary policy. Because, permanent price stability is a prerequisite for sustainable growth, social welfare, fairer income distribution, and higher employment. Once we achieve our objective, our currency will have the prestige it deserves, and those who produce, who work hard, and who give life to the economy will win. Thus, we will further reinforce the strong and stable economy in which we will look to the future with confidence, produce more, and gain more.

We have set out on a new road believing that a reliable monetary policy will bring with it permanent price stability and ultimately a prosperous economy. As of early November, we made a paradigm shift that aims to build confidence in monetary policy. All the steps that we have taken since I took office as Central Bank Governor were taken with a view to supporting this paradigm shift in monetary policy and building confidence. All these steps serve a single objective: Permanent price stability.

We have taken many important steps in pursuit of this objective so far.

We started off by underlining our adherence to the price stability objective and the inflation-targeting regime. We expressed our commitment to strengthening communication in line with the transparency, accountability and predictability principles in monetary policy.

Then, in view of the risks to inflation, we decided to deliver strong monetary tightening in November1 and December2. At the same time, we simplified the operational framework of monetary policy, and announced that we would provide all funding through the one-week repo auction rate, which is the main policy rate. In addition, we also simplified the reserve requirement regulation3.

While remaining tight in our monetary stance in January, we gave forward guidance indicating that the tight monetary policy stance might be maintained for an extended period and additional monetary tightening would be delivered if needed. We reinforced our forward guidance significantly by making it clear in the statements we made during that period that a rate cut seems unlikely to be on our agenda for an extended period this year given the current inflation risks.

In this period, we have also taken steps in line with the principles of transparency, accountability and predictability. For instance, we started to release the swap data on our website in early January. This transparency-boosting move was followed by the publication of the International Reserves and Foreign Currency Liquidity table on a weekly basis. Moreover, we have clearly shared with the public under which conditions, directions and strategic criteria and indicators we will implement the reaction function of the monetary policy. Accordingly, we stated that the level between the realized/expected inflation rate path and the monetary policy rate path until the 5 percent target is reached will be set by aiming for a strong disinflationary balance; this balance will be preserved continuously4.

We affirmed our adherence to the free exchange rate regime. We announced that we would not conduct foreign exchange buying or selling transactions to determine the level or direction of exchange rates5.

We are going to take firm steps in pursuit of price stability on the back of a confidence-oriented monetary policy in the upcoming period as well.

We aim to bring inflation down to 9.4% at the end of 2021, however we are also aware of the risks thereof. Therefore, while sustaining a tight monetary policy, we will aim to enhance the effectiveness of our policies on the back of an effective communication approach, inclusive of all stakeholders. We will maintain the tight monetary policy stance until we achieve the target of 5%. We will not content ourselves with achieving the target, but we will do whatever necessary to maintain this level in inflation. In brief, we would like to underline that this strategy of ours is not a temporary, but a medium-term strategy, and will be implemented decisively until the targets are reached.

As capital inflows become stable and strong, and residents’ inclination toward dollarization is reversed, we will build up reserves through FX buying auctions. Once the necessary conditions are in place, we will announce our related plans in an open and transparent manner.

No matter how determined we are as the Central Bank, we need the support of all segments of the society on this matter. Coordinated work with all stakeholders on this challenging road will contribute to us a great deal.

While sustaining the fiscal discipline is the key, we think that structural reforms in legal and economic fields will also underpin disinflation through expectations.

Meanwhile, we also believe that the support of the general public to the disinflation process is also important. Building awareness of price stability in the public is critical to us. We are striving to raise this awareness by enhancing the communication with our stakeholders such as business representatives, non-governmental organizations, economists and the academia. Accordingly we attach great importance to the recent statements of support from the business circles.

One of the primary targets of the communication policy in the near future will be explaining to all stakeholders the importance of price stability as well as the policies implemented to this end, and raising social awareness of the fight against inflation. Accordingly, we are planning a comprehensive communication strategy that incorporates all our communication tools and reaches all stakeholders.

We rely on the support of all members of the society to achieve our 5% inflation target in 2023, the hundredth anniversary of our Republic.

As always, the Central Bank will work to gain the trust of all economic actors by keeping the right policies in place, and, thus, achieve permanent price stability and make an outstanding contribution to social welfare.

Permanent price stability will protect people who believe and trust in our economy, restore the prestige of our currency, and, hence, help us face the future with confidence. I am confident that we will achieve it.

 

1 CBRT, Press Release on Interest Rates, 19 November 2020.

2 CBRT, Press Release on Interest Rates, 24 December 2020.

3 CBRT, Press Release on Reserve Requirements, 27 November 2020.

4 CBRT, 2021, Inflation Report 2021-I.

5 CBRT, Monetary and Exchange Rate Policy for 2021, 16 December 2020.

Naci Ağbal

Governor of the Central Bank of the Republic of Turkey

Note To Editor
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