CBRT Governor Evaluated Monetary Policy

CBRT Governor evaluated the monetary policy. President Naci Ağbal touched upon critical points on the issue.

In an interview with Reuters News Agency, CBRT President Naci Ağbal explained why it is important to maintain the tight monetary policy stance for a long time. CBRT Governor Ağbal said , "Past experience has shown that your delayed response can have higher economic costs.", and emphasized that the tight stance in monetary policy should be maintained for a longer period compared to previous predictions. Accordingly, Ağbal said that the interest rate increase will not be on the agenda for a long time. "The market expectations are that interest rate cuts will begin, albeit with a limited maturity of 3-6 months. Markets expect inflation between 11-12% in the year and draw a scenario where interest rate cuts will start, albeit limited, as of the third quarter. Is the market pricing you right?" Ağbal answered the question as follows: “As we shared in the January Inflation Report, we anticipate that wages, food prices and international commodity prices will affect inflation upward, while administered / directed prices and inflation expectations will affect inflation downward in the forecast path we have announced for 2021. We expect inflation to decline to 9.4 percent, however, upside risks remain significant on these forecasts, so the tight monetary policy stance should be resolutely maintained for a long time. Many different factors play a role in market pricing. Inflation expectations and the inflation uncertainty that these expectations contain lead the way among these factors. We acknowledge the existence of upside risks and if these risks occur, we will further tighten and reduce their impact on the inflation outlook. Therefore, as our determination is confirmed by the market, inflation expectations will converge to our year-end forecast target. The timing of the rate cut process will depend on the realization of inflation realizations and our medium-term outlook forecasts in line with the path we envisioned in the Inflation Report. In any case, we will continue to keep the policy rate at a level that will not only reach the 2021 target, but also the medium-term inflation target within the foreseen period. " CBRT Governor Ağbal said, "How much do the reserves need to rise? Or are you far from accumulating reserves?" Said the following: "Increasing our reserves under favorable conditions continues to be a priority. As stated in the Monetary and Exchange Rate Policy for 2021, it will be aimed to strengthen foreign exchange reserves in terms of the effectiveness of monetary policy and financial stability in 2021, and the tools for this will be transparently, within a certain plan, and appropriate to be used in conditions. In 2021, foreign currency rediscount loan returns will continue to contribute to foreign exchange reserves. This year, we anticipate that the reserve-enhancing effect of rediscount loan returns will be around $ 21 billion. In addition, in periods when the foreign exchange supply in the market rises steadily and steadily compared to the foreign exchange demand, our Bank will be able to hold foreign exchange buying auctions with transparent methods, provided that they comply with the floating exchange rate regime, within a plan whose rules have been announced beforehand.” "Unemployment is high / food prices are too expensive / SMEs are now more difficult to access credit ... How does this policy affect the risks you need to balance while keeping the interest rate so high?" CBRT President Naci Ağbal gave the following answer to the question: “First of all, I would like to express that, despite the restrictive effects of the epidemic, the economy showed a strong performance in the 4th quarter, production, investment, consumption, export and import indicators point to a strong economic activity. Even though economic activity lost its momentum in the current period, its widespread power. These developments have resulted in a very strong recovery in industrial employment, and strong demand conditions remain important despite tightening financial conditions on inflation. Enterprises, including SMEs, continue to benefit from the opportunities provided by the strong expansion credit and liquidity conditions created during the pandemic period. In the current period, the tight monetary policy and the tightening of the financial conditions through the transmission mechanism will lead the economy to a more moderate economic activity level through the demand channel. This tendency, on the one hand, makes the disinflationary effect more pronounced and pulls down the inflation; On the other hand, the decrease in financial risks and the expectation of stability in the economy will strengthen a positive trend in long production and investment indicators. In this respect, with the increase in confidence in monetary policy and the transformation of expectations from short-term to long-term, the process we are in will present an appearance in which production and investments in the economy increase and employment generally improves. If we carry out this process together in a determined and patient manner, as confidence in the economy will increase, investments and production will increase, thus unemployment will decrease. Food prices, which have an important share in the inflation basket, remain the most important risk on inflation due to their volatility and high pricing level. It is an important risk on the inflation outlook in 2021. Relevant ministries continue to work on the structural steps to be taken in this regard. Within the scope of the Food and Agricultural Product Markets Monitoring and Evaluation Committee, we are making an intense effort to monitor prices, to develop inter-agency cooperation and solutions. In this context, we even established a unit in our Bank called the Food and Agricultural Product Markets Analysis Department. This unit will act as an early warning by analyzing the data on food and agricultural products prices, which are critical to price stability, in detail and on time.”     Click here for the full interview of CBRT President Naci Ağbal.