Bank to leave lira alone

ANKARA – Turkey’s central bank said yesterday it would gradually stop guiding the Turkish lira interbank and foreign exchange markets as it loosens its grip on the currency and concentrates on lowering its cripplingly high inflation rate. The moves would be the culmination of a switch in policy since last February when Turkey, faced with a spiraling financial crisis, abandoned a currency peg that had been the main tool for keeping inflation in check. The central bank said in a report outlining its 2002 foreign exchange and monetary policy that it aimed to gradually end its role as broker on screen-based lira and foreign exchange markets this year. But it said such moves would mostly come in the second half of 2002, as the first half will be devoted to developing lira-forex markets and strengthening the banking sector. It will continue to announce short-term lira interest rates and manage lira liquidity via open market operations in line with the central pillar of its policy – to lower inflation. The report also said work was underway to establish an interbank «Turkish lira reference interest rate.» The bank said it would raise its foreign exchange reserves without compromising Turkey’s free-floating currency regime. It would also continue limited interventions in the currency markets in case of excess volatility, provide banks with lira liquidity if need be, and neutralize excess liquidity. The bank will continue to withdraw excess liquidity injected to help state-owned banks and banks in receivership through reverse repos and borrowing on the interbank market. Inflation targeting The main aim of the central bank’s policy for 2002 is to move over to full-blown inflation targeting under which it will announce a monthly target and use all available tools, such as interest rates, to meet the target. The government aims ultimately to slash consumer price inflation to 35 percent by end-2002 from 67.3 percent at the end of November by setting short-term interest rates to meet pre-announced monthly inflation targets. In the intermediate stage, the bank will target base money and there will be no monthly inflation target but rather a longer-term goal. The report said the move to begin inflation targeting would come «when conditions are favorable,» without giving a date. Turkey is currently implementing a $19-billion IMF-backed crisis rescue program and is negotiating a new accord under which it expects $10 billion in additional IMF money in 2002. Base money – consisting of money in circulation, compulsory reserve requirements in Turkish lira and banks’ accounts with the central bank – is expected to expand by 40 percent in 2002, in line with targeted growth in nominal gross national product (GNP). The base money target may be revised if there is a net foreign currency surplus due to switching to the lira from foreign currencies and a strong balance of payments in 2002. The monetary base, which will be a performance criteria in Turkey’s new letter of intent to the IMF, was targeted at a maximum 7,750 trillion lira at the end of 2001. The report reiterated a pledge that the 2002 primary budget surplus target of 6.5 percent of GNP will not be loosened. «Reducing the primary budget surplus would not revive the economy but rather would deepen the recession. When the sustainability of the domestic debt, and thus the continuity of the program, is in question, such a move would only exacerbate the sickness (in the economy),» the bank report said.

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