The International Monetary Fund said on Friday that Turkey’s monetary policy easing had “gone too far” and called on Ankara to ensure that fiscal policy remained a main policy anchor.
The central government’s budget deficit has widened this year as Ankara ramped up spending in the wake of a currency crisis that drove the country into recession.
In September, Ankara revised its budget deficit forecast for 2019 to 125 billion lira ($21 billion) from 80.6 billion lira previously.
“While the recent fiscal stimulus has helped the economy recover, the underlying deficit has increased significantly. Directors recommended a broadly neutral fiscal stance in 2020,” the IMF said in its executive board assessment, adding that a “modest consolidation” is needed to ensure public debt remains low.
The central bank has cut its policy rate by 12 percentage points since July, after President Recep Tayyip Erdogan fired the former governor for not heeding his calls to lower interest rates.
“Given still-high inflation expectations, directors stressed that monetary policy should focus on durably lowering inflation, which would help permanently lower interest rates. In this context, they noted that recent monetary policy easing has gone too far,” the IMF said.
The independence of Turkey’s central bank has been a long-lasting concern of investors, with Erdogan supporting the view that high interest rates stoke inflation.
The IMF called for clearer monetary and intervention policy to bolster the transparency and the credibility of the central bank.