January 23, 2020 / 12:19 PM / a month ago

UPDATE 1-Central bank says Turkey should focus on reducing volatility

(Adds quote from minutes, policy context)

ISTANBUL, Jan 23 (Reuters) - Turkish policymakers must keep a lid on financial volatility and deliver predictable fiscal policies to keep an economic recovery on track, Turkey’s central bank said, adding its own policy will depend on further disinflation.

In the minutes of its policy meeting last week, released on Thursday, the central bank also said inflation expectations continue to improve and are broadly in line with its projection of 8.2% by year end, lower than most economists expect.

The bank has cut its key interest rate to 11.25% from 24% since July on the back of a stabilisation in the lira and a drop in inflation, which was 11.8% in December.

To “minimise a likely inflation-growth trade-off, it will be crucial that macro-financial policies (reduce) financial volatility...and that the predictability of the fiscal policy continues to be reinforced,” the central bank said.

Turkey’s economy is recovering from a brief but sharp recession brought on by a currency crisis in 2018. The government expects growth to jump to a 5% rate this year, more than most analysts expect.

While the bank has said it has less room to continue easing policy, analysts expect it to cut rates a little more in coming months.

“Keeping the disinflation process on track with the targeted path requires the continuation of a cautious monetary stance,” the bank said in the minutes. Policy will hinge on “indicators of the underlying inflation trend to ensure the continuation of the disinflation process,” it added.

The central bank started rate cuts after President Tayyip Erdogan removed the previous central bank governor because he was not following instructions on monetary policy, a move which heightened concerns over central bank independence.

Separately, Finance Minister Berat Albayrak said on Thursday that the Turkish central bank is as independent as the U.S. Federal Reserve. (Reporting by Ali Kucukgocmen and Tuvan Gumrukcu; Editing by Jonathan Spicer and Timothy Heritage)

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