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The following OECD assessment and recommendations summarise chapter 3 of the Economic survey of Turkey published on 17 July 2008.
Monetary policy was successfully managing disinflation but is now facing strong inertia of inflation expectations
Monetary and exchange rate policy was a successful pillar of the post-2001 recovery. However when, encouraged by this success, the Central Bank set an explicit medium-term inflation target of 4% for 2007 10, this objective met with important challenges: On the one hand, inflation inertia together with adverse supply shocks meant that headline inflation settled in at around 9%. On the other hand, prospects for real interest rates and high rates of return became very attractive, fuelling strong capital inflows and currency appreciation. Thus the Turkish economy faces a typical challenge of successful catching-up economies -- inflation inertia requiring a tight monetary policy, but competitiveness losses apparently going beyond the adaptation capacity of some sectors and generating pressures for lower interest rates and slower currency appreciation. The challenge became more evident in late 2007 and in the first half of 2008, when very high food and energy price increases fuelled headline inflation creating an upward risk for inflation expectations. Core inflation remained below headline inflation for a while but started to move towards it in Spring 2008, creating concerns about a new inflationary spiral. In this context, monetary policy needs an orchestrated support from a variety of policies to restart the disinflation process. Only then will the Bank be able to use its instruments successfully to keep inflation around the target. In this context, it is important that the revision of the inflation target for the next three years announced by the Central Bank in June 2008 is seen as an exceptional measure in the wake of unforeseeable shocks. In this environment the Central Bank is rightly maintaining a tight policy stance despite the cyclical weakness of the economy in order to avoid a misperception of a loosening commitment to “go the last mile” in achieving low inflation rates.
The sacrifice ratio of monetary policy can be significantly reduced if other policies are supportive
The Survey argues that Turkey’s monetary policy needs to be supported by policies which allow it to reach the target with reasonable costs. As is usually the case for a successful catching-up economy, potential output is a moving target and capacity constraints are either closed by imports or new investments. Tight monetary policy can put brakes on the economy, but its task will become prohibitively expensive if inflation expectations are not contained. In these circumstances, additional policy tools could be utilised to reduce domestic inflationary pressures and thereby improve inflation expectations, such as competition reforms to achieve price moderation in services, a fully enforced multi-year fiscal framework, and employers and employees adopting the inflation target as an anchor in their pricing and wage policies. The success of such policies would help alleviate the burden on the Central Bank’s policy interest rate as the unique instrument to increase the credibility of the inflation target.
Goods and service prices
How to obtain this publication
The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.The complete edition of the Economic survey of Turkey 2008 is available from:
For further information please contact the Turkey Desk at the OECD Economics Department at email@example.com. The OECD Secretariat's report was prepared by Rauf Gönenç, Rina Battacharya, Olcay Culha and Cafer Kaplan, under the supervision of Andreas Wörgötter. Research assistance was provided by Béatrice Guérard.