Central bank governor says stability of Turkish lira a priority for policy decisions and that lira exchange rate has continued to create an upside risk on inflation.

A money changer counts Turkish lira banknotes at a currency exchange office in Istanbul, Turkey. August 2, 2018.
A money changer counts Turkish lira banknotes at a currency exchange office in Istanbul, Turkey. August 2, 2018. (Reuters)

The Turkish lira has strengthened after the central bank governor vowed to pursue a tight monetary policy next year to rein in high inflation, while other emerging market currencies were boosted by a weaker dollar.

The lira rose 0.6 percent to trade at 7.7812 per dollar, hitting its highest level since in almost two weeks.

The Central Bank of the Republic of Turkey Governor, Naci Agbal, said price stability would be a priority for the bank’s policy decisions and that the lira’s exchange rate continued to create an upside risk on inflation.

Last month, the bank hiked rates by 475 basis points to 15 percent, but surging prices in November pushed annual inflation up to 14 percent, putting more pressure on the bank that holds another rate-setting meeting next week.

READ MORE: Turkish lira jumps as central bank hikes key interest rate to 15 percent

“An interest rate hike next week might be on the cards, which is something the market is taking as a positive signal,” said Jakob Christensen, head of EM research at Danske Bank.

Signs of market friendly reforms under President Recep Tayyip Erdogan helped the lira rally in November, but the currency is down nearly 24 percent this year due to a spike in inflation, worries about foreign reserves as well as the recent US sanctions imposed on Turkey.

Single-digit inflation target

Monetary policy decisions will be taken by giving priority to price stability, Agbal stressed.

An annual inflation target of 9.4 percent for end of 2021 is the CBRT's intermediate target, noted the governor, adding that the bank is sticking to the government target of 5 percent in the medium term.

"Aware of its responsibility in reaching this target (5 percent), the CBRT will remain determined and resolute over the target horizon," he noted.

Agbal said monetary policy will be adopted in a simple and understandable framework next year.

Stressing that one-week repo auction rate is the main policy instrument of the bank, Agbal said: "The interest rate corridor that is used to limit intraday volatility in overnight interest rates and the Late Liquidity Window that performs the CBRT‘s role as a lender of last resort will not be utilised as monetary policy instruments except for their above-mentioned functions."

READ MORE: US sanctions on Turkey: How did we get to this point?

Source: TRTWorld and agencies