Türkiye’s central bank chief on Tuesday dispelled speculations surrounding the monetary authority’s currency policies and reaffirmed the institution’s dedication to maintaining financial stability and ensuring price stability amid a shift toward a more conventional policy framework since after the May elections.
Hafize Gaye Erkan, the Central Bank of the Republic of Türkiye (CBRT) governor, said the institution had no intention of influencing the levels or directions of the Turkish lira. She stated that the bank did not engage in foreign exchange transactions for the purpose of determining or influencing exchange rates.
"If we had the intention to control the exchange rate, the currency fluctuations observed since our appointment would not have occurred," Erkan stated, dismissing speculations about the bank's motives.
The lira has depreciated some 30% against the U.S. dollar this year, with most of the declines taking place following the May vote that secured President Recep Tayyip Erdoğan another five-year term. The currency traded at 27.5683 to the dollar on Wednesday.
“We have no (specific) exchange rate target, no exchange rate projection,” Erkan said as she addressed the queries of lawmakers during a session of Parliament’s Planning and Budget Commission.
She highlighted that the bank’s intervention, if any, in the foreign exchange market was minimal and aimed at preventing excessive volatility, a common practice among global central banks.
“The central bank definitely does not make foreign exchange purchase or sale transactions aimed at determining the level or direction of exchange rates,” Erkan said.
Addressing concerns about speculative attacks on the currency, Erkan pointed out that the institution occasionally engaged only to provide necessary liquidity. She emphasized that such interventions have been minimal since her tenure began after Erdoğan named her in June to be the first woman to run the central bank.
“The numbers are low, and our intervention is only done to prevent excessive volatility when there is a speculative attack, as all global central banks in the world do, and this has been minimal since I arrived,” she said.
Erdoğan reshuffled his Cabinet and named a new economic team of technocrats with Wall Street experience and broad support among foreign investors to reverse the yearslong easing cycle and embrace more conventional economic policies, including aggressive monetary tightening.
Last month, the central bank raised its key interest rate by 500 basis points to 30%, tightening policy for four straight months. Since the June policy pivot, it has hiked rates by 2,150 basis points to rein in stubborn inflation, which rose to more than 61% in September.
Erkan said her appointment came with a clear directive: to ensure price stability and to remove inflation from the public agenda.
And she emphasized that the bank remained steadfast in fulfilling this mandate, ensuring stability and sustainable growth.
Regarding inflation concerns, Erkan addressed misconceptions prevalent in public discourse. She emphasized that effective policies could achieve disinflation without compromising economic growth, provided that extreme inflationary pressures were eliminated.
"Stable inflation at low levels is an indispensable condition for predictability, for long-term savings and investment decisions, and for sustainable growth with low volatility,” she said.
“Misconceptions and concerns about the inevitability of giving up growth as a way to achieve disinflation under all circumstances are occasionally voiced in public opinion.
"However, in cases where inflation is both high and volatile, disinflation can be achieved without compromising growth by implementing ‘right’ policy designs until inflation recedes to specific threshold levels,” she explained.
Erkan stressed that the trade-off between growth and inflation would only come into play once excessive inflation is eliminated and certain threshold values are reached.
“At this point, the objective should be to steadfastly continue the process of disinflation while not deviating from the growth composition necessary for sustainable growth,” she noted.
“Within this context, our monetary policy and macro-prudential framework strategy are focused on establishing disinflation and sustainable growth as soon as possible.”
Erkan also clarified that there are no plans to withdraw money from circulation or print higher denominations of banknotes amid soaring prices.
Among others, the governor reiterated the goal of a gradual exit from a government-backed scheme that safeguards Turkish lira deposits against foreign exchange depreciation.
The scheme, unveiled in late 2021 and known by its acronym KKM, sought to keep dollarization at bay by encouraging people to keep their savings in lira through guarantees to compensate for losses from decline against hard currencies.
The bank has begun rolling back the initiative and announced measures, aimed at dissuading companies and individuals from renewing the KKM accounts.
To cover KKM depreciation costs, the central bank paid an estimated TL 90 billion in the first half of 2023, said Erkan. The payments from the Treasury amounted to some TL 60 billion, she added.
She emphasized a decrease in KKM coupled with the increase in reserves, a shift toward lira deposits, and a decline in foreign currency deposits.
“We will continue to do whatever it takes to sustain this very positive development,” Erkan said.
