Treasury and Finance Minister Lütfi Elvan said Friday a decisive stance and policies that reflect that will help bring down inflation expectations, underlining that Turkey will by no means back down from its inflation target for the sake of short-term gains.
"The fight against inflation is at the center of all our policies," Elvan told a meeting with businesspeople in the northwestern Bursa province.
"A determined stance and implemented policies will play an important role in breaking upward expectations in inflation," the minister noted.
The Central Bank of the Republic of Turkey (CBRT) Thursday said that recent import-price pressure could harm inflation expectations and it repeated a pledge to maintain its policy stance, as it held interest rates steady at 19% as expected.
"In addition to the recent import-price-based cost factors, demand conditions, supply constraints in some sectors and high levels of inflation expectations continue to pose risks to the pricing behavior and inflation outlook," the bank’s policy committee said in a statement after its monthly meeting.
But "the decelerating impact of the monetary tightening on credit and domestic demand has begun to be observed," it added. "The policy rate will continue to be determined at a level above inflation."
Turkey’s inflation rate unexpectedly fell from a two-year high to 16.59% year-on-year in May thanks largely to limited price increases during a full lockdown in the first half of the month.
It had quickened to 17.14% in April, the highest since mid-2019, due to surging commodity prices and the sharp fall in the Turkish lira, which raises import prices.
The annual producer price index rose to 38.33% in May. That is expected to contribute to headline inflation in the coming months, as the input costs are reflected in consumer prices.
Increasing effect of exchange rate volatility
Elvan also warned of the increasing effect of the volatility in the exchange rates on prices.
The lira firmed up to 1% on Friday but was set for its worst weekly performance in two months after a hawkish U.S. Federal Reserve (Fed) and political risks left emerging markets bruised.
The lira has fallen around 3.3% this week and is just a little over a percent away from recent record lows.
An index of emerging currencies was set for its worst week in nine months. Emerging equities snapped a four-week winning streak, weighed down by losses in China, which is seeing renewed tensions with the West.
The CBRT met a day after the Fed signaled interest rate rises in 2023, dealing a blow to emerging-market assets.
"As exchange rate stability and inflation begin to fall, the risk premium of our country will also fall, capital inflows will accelerate, demand for Turkish lira assets will increase, and the confidence environment will lead to stable growth," he added.
"What matters to us is the sustainability and inclusiveness of growth."
Among others, Elvan said companies should evaluate an initial public offering (IPO) for financing, also warning them to not undertake loans they cannot repay.
He also said they would accelerate policies that would further deepen the banking sector as well as the interest-free financial system and capital markets for financial access.
Momentum in inoculation drive
Elvan was also upbeat about recent momentum in the country’s inoculation drive, saying its positive effect on both the economy and social life would be seen in the coming period.
Turkey has been reporting below 6,000 daily cases on average in recent days.
Health Minister Fahrettin Koca announced on Twitter a record 1.58 million doses had been administered in just one day on Thursday.
The country has so far administered over 38.85 million doses of COVID-19 vaccines since it kicked off a mass vaccination campaign in mid-January.
Over 14.15 million people have been fully vaccinated and around 24.7 million people have received a first dose.
"Over 1 million doses of vaccines are being administered per day; this is a tremendous success. I hope that we will see the positive impact of this situation in the coming period, both in the economy and in the normalization of social life," Elvan said.
COVID-19 supports to continue
Turkey was under full lockdown until the first half of May, aimed at slowing the spread of new COVID-19 cases. It has been gradually easing measures since then.
"With the contribution of the steps taken, we closed the year 2020 with positive growth. The economic activity showed a brisk performance in the first quarter of 2021," he noted.
Turkey’s economy expanded 1.8% in 2020, one of only a few globally to avoid a contraction due to the pandemic thanks to a state-lender-led credit boom mid-year.
It grew 7% in the first quarter of this year and economists expect it to expand around 5.5% this year.
Elvan also said the government would continue with the COVID-19 supports.
The pandemic support from the central government budget and multiple funds such as the government’s unemployment fund has so far reached TL 141 billion, the minister said.
This figure will amount to TL 191 billion ($21.99 billion) by year-end and Elvan said Turkey will have injected around 3.4% of its gross domestic product (GDP) into the economy as pandemic relief.