Murat Uysal

TCMB recently underwent a management change, most notably with your appointment as governor. Moving forward, how does the refreshed bank plan to maximize communication and enhance the effectiveness of its operations?

The way central banks all over the world communicate has constantly evolved over the last few decades. In line with this evolution, TCMB also built strong corporate communication channels and invested a great deal of attention in this area, particularly after the amendment to its law in 2001. But there is still a lot of room for improvement. So, in the upcoming period, we will try to further these endeavors together with my colleagues. Establishing effective, transparent, and inclusive communication with the public on various platforms will strongly contribute to the effectiveness of our operations and achieve our objectives. In this context, our first steps will be to increase our corporate transparency and strengthen our monetary policy communication. A few practices may come up at the top of the agenda. First, we should share more information on the monetary policy decision-making process and the reasons underlying our decisions. This is crucial for the public to understand the arguments behind the decisions of the central bank. Second, we can fill some of the missing aspects in the process of sharing data on the bank’s market operations. Moreover, sharing information of higher credibility regarding our monetary policy strategy more frequently will be beneficial. Moreover, thematic speeches that express our stance on some key monetary policy issues will be useful to clarify TCMB’s overall approach to the public. In addition, we continue to work on enhancing the communication of the bank with its stakeholders. Accordingly, investors, financial institutions, and corporate sector representatives, and, above all, the financial press will continue to be our main stakeholders. Explaining the importance of price stability as well as the central bank’s role to all segments of society has a significant role in achieving price stability. Moreover, the consistency of policies is also extremely important, and in this context, we will work in tandem with all parties that will provide input to the processes to enhance effectiveness of the monetary policy.

Citing reduced inflation and data indicating a moderate recovery in economic activity, TCMB reduced its policy rate from 24% to 14%. Can you outline the specific goals of the rate cuts, as well as its potential risks?

Economic activity, which contracted in the second half of 2018, started to recover at a modest pace in 2019. Both domestic and external demand contributed to the recovery in the first two quarters of the year. The main driver of domestic demand was private consumption, while investment demand remained weak due to tight financial conditions and elevated levels of financial volatility. On the external demand front, despite recent signs of global slowdown, competitiveness gains and market diversification led to a solid performance in exports of goods and services, while import demand remained subdued. As a result, the contribution of net exports remained positive, also with the help of buoyant tourism demand. Recent data indicate that moderate recovery in economic activity continues. While favorable effects of improved competitiveness prevail, weakening global economic outlook tempers external demand. Looking forward, net exports are expected to contribute to economic growth, although to a lesser extent, and the gradual recovery is likely to continue with the help of the disinflation trend and improvement in financial conditions. The current account balance, which has recently recorded significant improvement due to the composition of growth, is expected to maintain a moderate course. Inflation has displayed a persistent downtrend since October 2018. Tight monetary policy stance has been instrumental in controlling inflation and inflation expectations. In order to steer inflation expectations in the right direction and contain risks to pricing behavior, we have strengthened the emphasis on the role of published inflation forecasts as intermediate targets. Accordingly, we have made an explicit commitment to keep the underlying trend of inflation close to the published projections for the next three years. Accordingly, actual inflation has mostly remained close to, or even below, the lower bound of TCMB’s published projections since October 2018, which has improved forecast credibility. The inflation outlook continues to improve. Over the course of the year, the relative stability of the lira and the negative output gap played a major role in disinflation, while falling import prices and food prices also contributed to the decline. We project inflation to converge to the underlying trend as the base effect fades away in the coming months. According to the October inflation report, forecast inflation will materialize around 12% by the end of 2019. The ongoing improvement in inflation dynamics and pricing behavior created room to reduce the monetary policy tightness. We delivered three rate cuts in July, September, and October, bringing the policy rate to 14% from 24%. The current monetary policy stance is largely consistent with the projected disinflation path that envisages a fall to 8.2% by the end of 2020. The easing in financial conditions supports the moderate recovery trend in economic activity by strengthening confidence and credit channels. We predict the economy will gradually return to its potential growth rate, hence the output gap will remain supportive of disinflation also in 2020. The sustained disinflation process is the key to achieve lower sovereign risk, lower long-term interest rates, and stronger economic recovery. Monetary stance should remain cautious to keep the disinflation process on track with the targeted path. We will determine the tightness of monetary policy based on the indicators of the underlying trend of inflation to ensure the disinflation process and will continue to use all available instruments in pursuit of price and financial stability.

From both a domestic and global standpoint, what are the biggest challenges facing the Turkish economy, and what are TCMB’s most effective tools to solve them?

On the domestic front, steering the economy toward a sustainable growth path and ensuring financial stability are of key importance. This in turn depends on sustaining the disinflation process and achieving price stability. Given the persistently elevated levels of medium-term inflation expectations and associated risks regarding the pricing behavior, it is crucial to keep the disinflation process consistent with the target. This requires maintaining a tight monetary stance and enhanced policy coordination that prioritizes the decline in inflation. Anchoring inflation expectations around the projected disinflation path, and ultimately around the target of 5%, will enhance the effectiveness of monetary policy and reduce possible tradeoffs associated with disinflation. The re-balancing process that the economy has undergone is smoothly evolving into a healthier growth outlook over the next year. A macro-policy mix that prioritizes the decline in inflation through strong policy coordination will improve the external financing opportunities and long-term interest rates by reducing the risk premium, which will gradually strengthen domestic demand. By preserving monetary and fiscal discipline, reducing macro-financial risks and increasing predictability in the economy, economic growth will be steered toward a balanced and sustainable path over the medium term.

Under TCMB’s new leadership, what are the goals of the bank over the next 12 months?

Our main goal is to sustain the disinflation process and bring inflation down to 8.2% by end-2020. Maintaining a sustained disinflation process is the key to achieving lower sovereign risk, lower long-term interest rates, and stronger economic recovery. On the back of mildly supportive global financial conditions, we expect the level of monetary tightness and the ongoing improvement in country risk premium to contribute to the stability of the exchange rate. The improvement in the current account is also expected to support the lira. As the fall in inflation becomes more apparent and exchange rate volatility is contained, inflation expectations are expected to converge to our 2020 forecast of 8.2% in 2H 2020. Our decision-making processes will continue to be data-driven. In addition to all macroeconomic indicators, primarily inflation and economic activity, we are closely monitoring micro dynamics and field data. To enhance effectiveness of the monetary policy, we are working in tandem with all parties involved. Also, we will continue to pay effort to enhance the communication of the monetary policy, which will provide major contributions to achieving our targets.