Central Bank eyes 5% inflation with ease in monetary policy

The Central Bank (CBRT) remained the inflation target at 5% in the Monetary and Exchange Rate Policy Report for 2022. The bank will work to strengthen its reserves in line with the report, which didn’t include statements about the tight monetary policy. 

Although the financial stability was emphasized in the report, statements about the tight monetary policy, which was highlighted in the previous report, was removed as it was in the Monetary Policy Committee (PPK) statements. The bank, which announced the steps towards strengthening reserves in 2022, kept the medium-term inflation target of 5% and pointed out that it will reduce swap amounts. 

The bank summarized the main framework of its monetary and foreign exchange (FX) policy for 2022 in eight items as follows: 

>> The primary objective of the Central Bank of the Republic of Turkey (CBRT) is to achieve and maintain price stability. The medium-term inflation target of 5% set jointly with the Government, has been maintained. The monetary policy will be formulated to bring inflation to the target levels gradually.

>> In 2022, the CBRT will continue to implement the inflation targeting regime in a manner to create a foundation for sustainable price stability. 

>> The CBRT’s main policy instrument is the one-week repo auction rate. 

>> The CBRT will use reserve requirements as a supporting instrument in pursuit of the price stability and financial stability objectives. In this framework, the Reserve Options Mechanism will be completely terminated in 2022, and costs of foreign currency liabilities will be increased while mechanisms to promote Turkish lira deposits will be prioritized.

>> The CBRT will also continue to safeguard financial stability, which is a supporting factor for price stability. Accordingly, in 2022, the CBRT will use the policy instruments at its disposal in the most effective way to ensure the smooth functioning of the monetary transmission mechanism and to limit the risks to macro-financial stability. 

>> The implementation of the floating exchange rate regime will continue, and exchange rates will be determined by supply and demand factors balancing under free-market conditions. 

>> For effective monetary policy and financial stability, the CBRT aims to strengthen its foreign exchange reserves. The CBRT will continue to build up reserves in 2022 as long as market conditions are suitable. 

>> Committed to the principles of transparency, predictability, and accountability, the CBRT will continue its policy communication and data release in 2022.

The bank stated that FX rates, increase in import prices, supply-side factors, managed/directed prices, and demand developments were affected the inflation surge in the third quarter of 2021.  “The cumulative impact of policy decisions will be closely monitored in the first quarter of 2022 and all aspects of the policy framework will be reassessed to create a foundation for sustainable price stability during this period,” the Central Bank said. 

“Structural factors have a major effect on inflation overshooting the target. Sustaining the structural reforms that will reduce inflation inertia and volatility will contribute significantly to price stability and social welfare. Accordingly, the CBRT will continue its efforts to analyze structural elements and raise public awareness in this regard and will holistically use all available communication tools,” the bank added. 

Within the scope of the TRY liquidity management for 2022, the Central Bank also announced to revise the size of the Open Market Operations (OMO) and swap transactions, which are the main components of the current TRY liquidity management, their share in total funding, and distribution by the facility and the collateral structure. The bank will raise the share of OMO funding and TRY assets in the collateral structure and it will gradually reduce swap transaction amounts. 

Rediscount credits’ reserve contribution to rise

As of December 24, the amount of rediscount credits extended in TRY to exporters and FX-earning services providers via the acceptance of FX- denominated bills for rediscount totaled around USD 18.9bn, while the amount of rediscount credits extended via the acceptance of TRY-denominated bills for rediscount was USD 0.7bn, according to the Central Bank. 

“In 2021, the contribution of rediscount credits to CBRT reserves was USD 20.7bn, which is expected to reach USD 21.0bn by the end of the year. USD 16.6bn is guaranteed to be included in the CBRT net reserves through rediscount credits in 2022, and the contribution to reserves in 2022 is expected to be higher than 2021 in line with the arrangement that took effect on October 1, 2021,” the bank said. 

Here are the salient factors included in the CBRT’s Monetary and Exchange Rate Policy Report for 2022: 

>> The implementation of the floating exchange rate regime will continue.

>> The one-week-repo rate will continue to be the main policy instrument. 

>> The size of the OMO transactions will be determined as 5% of the CBRT assets. 

>> More reserve increase is estimated with rediscount credits in 2022. 

>> The Reserve Options Mechanism (ROM) will end in 2022. 

>> The CBRT may gradually reduce FX sales to the government institutions. 

>> The CBRT will continue talks with other monetary authorities for swap deals. 

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