Süleyman Yaşar

ACCORDING TO IMF TÜRKİYE  CONSULTATION REPORT: Lira strength will eventually raise the risk of overvaluation

Exchange rate policy should focus on smoothing excessive volatility that could dislodge inflation expectations. Foreign exchange intervention (FXI) has helped smooth lira volatility and respond to shocks that could destabilize inflation, but a sustained period of lira strength will eventually raise the risk of overvaluation and sudden adjustments. Macro adjustment aimed at bringing down inflation will reduce the need for FXI by helping reanchor inflation expectations. As this occurs and as reserve buffers recover, greater lira flexibility should be allowed. If high rates attract speculative inflows, reserve accumulation ceilings can add volatility, reduce carry trade attractiveness, and strengthen buffers.