Jan. 9 (Bloomberg) -- The lira is under “significant depreciation pressure” and the central bank should tighten monetary policy as its policy rate is redundant and dollar reserves are not particularly robust, Goldman Sachs Group Inc. said.
“Domestic financial conditions are still not tight enough and more policy adjustment is necessary to bring about a swifter current account correction,” Ahmet Akarli, Goldman’s economist for the region, said in an e-mailed report. The policy rate of 5.75 percent is “now redundant,” he said.
The central bank has “no viable option” than to tighten monetary policy or the alternative “could imply a weaker exchange rate, a more persistent inflation overshoot, a de- anchoring of inflation expectations and a more costly policy adjustment, culminating in more significant output losses,” Akarli said.
Goldman expects the central bank to increase its average short-term funding rate to 13 percent in the coming months, Akarli said. The bank may also need to realign its interest rate corridor at “a higher, but significantly narrower range,” he said.
Risks to Goldman’s 0.8 percent economic growth estimate for 2012 are “on the downside” and the Eurozone crisis may intensify capital account pressures, he said.
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