Turkey's proactive policy curbed risks, cenbank chief says

ANKARA/WASHINGTON, April 24 (Reuters) - Turkey's central bank chief said that monetary policy has been "proactive" and has contained re-dollarisation risks, with retail FX demand limited, after market turmoil last month sparked by the arrest of Istanbul's mayor.

In the text of a presentation made in Washington on Wednesday, Governor Fatih Karahan said policy transmission, or effectiveness, has improved considerably over the last year and that disinflation is continuing.

"Monetary policy has been proactive," the presentation to foreign investors and others said. "Re-dollarization risks are contained by a decisive tight policy stance."

Though he added: "risks are alive" on the disinflation path, and that the economic growth outlook is "highly uncertain" due to global trade tensions.

Karahan and Finance Minister Mehmet Simsek are in Washington this week to attend the annual meetings of the International Monetary Fund and World Bank. They met U.S. Treasury Secretary Scott Bessent on Wednesday.

The central bank hiked its main policy rate to 46% from 42.5% and lifted the overnight lending rate to 49% last Thursday. The move reversed an easing cycle in response to a sharp selloff in lira and other Turkish assets, triggered by the arrest of Istanbul Mayor Ekrem Imamoglu.

The tight stance will be maintained until price stability is achieved via a sustained inflation decline, Karahan said in the presentation, which the bank published. The bank's decisiveness is strengthening the disinflation process, he added.

When Imamoglu was detained on March 19 the lira crashed by as much as 12% to a new record of 42 to the dollar before recouping most of the losses due largely to central bank steps, including foreign exchange sales.

Imamoglu is now jailed pending trial over charges that have been widely criticised as anti-democratic, sparking concerns among investors over rule of law in a big emerging market that had attracted foreign inflows over the last 18 months or so.

Karahan said the weaker currency's pass-through effect on inflation is modest, reflecting improvement in pricing behaviour, while falling oil prices support disinflation, but the global economic outlook is uncertain.

This pass-through is expected to be around 35-40%, considerably lower than that during the summer of 2023, declining amid lower forex-protected KKM account balances, improved inflation expectations and moderating demand, he said.

The presentation showed that the overnight interest rate has remained at or near 49%, the upper band of the rate corridor, since policy was tightened last week. Bankers say it is expected to remain there for some time to come.

Elsewhere in Washington, Simsek said the current account deficit would be less than the 2% of gross domestic product forecast in the government's medium-term programme, and was likely to be around 1.2%, narrowing because of oil prices.