Ankara: The governor of the Central Bank of the Republic of Trkiye (CBRT) has highlighted the significant impact of ongoing tensions in the Middle East on energy prices, which have subsequently exerted cost-push pressure on inflation across various sectors.
According to Anadolu Agency, Governor Fatih Karahan underscored that the war is expected to continue affecting inflation through cost- and supply-side disruptions. These disruptions have already begun to create additional pressures on the inflation outlook. Karahan emphasized the Central Bank's commitment to ensuring the necessary monetary tightness to support the disinflation process amidst these challenges.
In terms of measures to reduce inflationary effects, Karahan explained that a permanent increase of 10 percent in oil prices could add approximately 1.1 percentage points to consumer inflation over a year. However, the implementation of the sliding-scale system helps to significantly mitigate this impact, reducing it to one-third of the potential increase.
The war's implications extend beyond energy prices, affecting Trkiye's growth and current account deficit dynamics. The governor noted that rising energy costs and external uncertainties could lead to a decline in economic activity, with potential weakening of external demand exerting downward pressure on growth rates. A 10-percent increase in oil prices, according to analyses, could cause a 0.4 to 0.7 percentage point decline in the growth rate over a year.
Recent developments have prompted the Central Bank to take measures aimed at maintaining the attractiveness of the Turkish lira in domestic markets. This includes conducting Turkish lira-settled foreign exchange forward selling transactions and bringing forward bond purchases to prevent outflows from money market funds.
Addressing the reserve policy, Karahan explained that the Central Bank has increased its gold reserves significantly over the years, with gold-backed transactions playing a crucial role in liquidity management. The bank has engaged in FX/Gold swap transactions to reinforce foreign exchange liquidity, while also resuming Turkish lira-Currency Swap transactions to address increased demand from banks.
Karahan concluded by reiterating the bank's proactive approach to reserve management and liquidity instruments, aiming to support price stability and reinforce financial stability amidst ongoing geopolitical and global challenges.