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Turkish economic rebound hinges on monetary policy given high inflation: World Bank

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A strong Turkish economic rebound this year hinges on “robust” monetary policy given high inflation and the potential for external shocks as the US Federal Reserve considers when to cut stimulus, a top World Bank official said on Thursday.

David Knight, senior economist, said the World Bank expects 5 percent economic growth this year driven by an export recovery in Turkey, and 15.5 percent average inflation over the course of 2021.

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But in a web presentation, he and Hakan Kara, former chief economist at Turkey’s central bank, said a willingness to keep interest rates sufficiently high will be necessary to defend the economy from a shift to tighter US monetary policy.

“The outlook this year is very uncertain and hinges on the course of policy ... especially monetary policy and the effectiveness of COVID control measures,” Knight said in presenting a World Bank report on Turkey.

The policy interest rate, at 19 percent, is “appropriately” set and “robust” monetary policy will be necessary to maintain growth, he said.

Turkey’s economy was one of only a few globally to expand despite the pandemic last year. After a slump in the last few years, growth should return to about 5.5 percent this year according to a Reuters poll, levels averaged over the last two decades.

Inflation has risen above 17 percent and has been in double digits for most of the last four years. Lira weakness has pushed it higher, and the currency could slide more when the Fed decides to curb its aggressive asset purchases.

“Monetary policy does not look tight enough to contain (Turkish) inflation expectations at this point,” said Kara, who is now at Bilkent University in Ankara.

As the US and others emerge from the coronavirus pandemic, an earlier than expected tightening of monetary policy in advanced economies is “the most serious risk” for Turkey, Kara said.

He added that there appeared to be a hesitancy to raise Turkish rates and that failing to tackle inflation in recent years “seems to be a political choice.”

The central bank’s credibility has been hurt by a rapid leadership turnover in recent years and its badly depleted foreign reserves, which leaves Turkey more vulnerable to financial shocks and has hurt the lira.

The currency was at 8.452 versus the dollar on Thursday, just shy of its weakest all-time level of 8.58 touched in November.

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