Turkish central bank: 2016 is year to fight inflation

DAVOS, Switzerland

Turkey will gradually reduce its inflation rate within the next three years, the head of Turkish Central Bank told Anadolu Agency in an interview on Friday on the sidelines of the World Economic Forum conference.

"Now, we will solve the problem," Erdem Basci said. "2016 will be the year to fight inflation and the fight will be continued in 2017 and 2018."

In 2015, the annual inflation rate rose to 8.81 percent in December, far higher than the bank's target, the Turkish Statistical Institute reported on Jan. 4.

"There is also need to make everyone believe that the inflation rate projected at 5 percent at the end of 2018 in the government's Medium-term Economic Program will be reached," Basci said.

The government aims in the Medium-term Economic Program to reduce inflation to 7.5 percent in 2016, to 6 percent in the next year and to 5 percent in 2018.

"We need to give two messages. The first is that, as the bank, we are committed to reducing inflation. The second is that the government is committed to doing its part.

Basci said that the country saw its lowest inflation rate in 2012 at 6.2 percent, the lowest rate in the past 45 years.

"So there is a process of reducing inflation in Turkey and it is still ongoing. The question is whether we can bring inflation to under 5 percent. So can we do it now? Unfortunately, we are not able to do immediately."

However, Basci said that his bank will do its part to reach the 5 percent inflation target by 2018.

"The current account deficit was no.1 problem in the country. It took 4 years to solve the problem...Turkey did this while keeping growth at good rate. That is a success. Today, Turkey comes second after India among countries which are showing high growth rate in developing countries.

We reduced the deficit from 10 percent to 4.5 percent last year. It may drop under 4.5 percent in 2016. ... This will help us to focus the fight against inflation because it may not be a lot of pressure on the exchange rate as it used to be. "

Low oil prices were expected to help narrow Turkey's current account deficit, according to the credit agency Moody's report on Dec. 9 of 2015.

According to Basci, it is too early for the central bank to abandon its use of a wide interest rate corridor in setting monetary policy and the bank has the capacity to reduce volatility by tightening liquidity policy.

"It is too early for Turkey to abandon a wide interest rate corridor at this stage. We have decided to maintain flexibility at this stage. We may need the flexibility...We could meet once a month and go back to working on turning short-term rates into a single interest rate. But it is too early for that. Volatility is extremely high. We need to see how the shock will be form. Can the normalization in the global economy take place without any problems? " he said.

Basci said that 1.5 percent growth rate in the European economy will increase Turkish exports strongly.

"The economic recovery in the EU and low energy prices are an important opportunity for Turkey," Basci added.

The bank its main interest rate unchanged at 7.5 percent for the 11th straight month on Jan. as the move was widely expected.