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IMF says Turkey’s monetary easing has gone “too far” and calls for a neutral fiscal policy in 2020

UNITED STATES (OBSERVATORY NEWS) — The International Monetary Fund said on Friday that Turkey’s monetary easing has “gone too far” and called on Ankara to ensure that fiscal policy remains a key cornerstone of policy.

The central government budget deficit widened this year as Ankara boosted spending in the wake of a currency crisis that sent the country into recession.

In September, Ankara revised its forecast for the 2019 budget deficit to 125 billion pounds ($ 21 billion) from 80.6 billion pounds previously.

“While the recent fiscal stimulus helped the economy recover, the underlying deficit increased dramatically,” the IMF said in an evaluation of its Executive Board. Managers recommend a broadly neutral financial position in 2020, adding that a “modest cut” would be necessary in order for public debt to remain low.

The Turkish Central Bank has cut the key interest rate by 12 percentage points since July, after President Recep Tayyip Erdogan dismissed the former governor of the bank because of his failure to comply with his demands to cut interest rates.

“Given the continuing high inflation expectations, managers stress that monetary policy should focus on sustainable low inflation, which will help to permanently lower interest rates,” the fund said. In this context, they point out that the easing of monetary policy in the recent period has gone very far.

The independence of the Turkish Central Bank has long been a cause of concern for investors, given Erdogan’s support for the idea that high interest rates are fueling inflation.

The International Monetary Fund called for a clearer monetary and intervention policy to strengthen transparency and the credibility of the central bank.

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