Inflation is the persistent increase in the general level of prices of goods and services in an economy. Today, many central banks are striving to attain stability by keeping inflation under control. In other words, they are trying to achieve price stability.
Price stability refers to an inflation rate low and stable enough that it would not influence the decision-making processes of economic agents. It is instrumental in growth and employment - the long-term targets of monetary policy.
The primary objective of the Central Bank in Turkey is to achieve and maintain price stability. Price stability does not necessarily imply that prices do not ever change; rather it entails avoiding persistent increases (inflation) or decreases (deflation) in the general price level. In this way, the purchasing power of the Turkish lira and hence its credibility as a currency unit would be preserved.
Economic Growth and Employment
The CBRT Law stipulates that “The Bank shall, provided that it shall not be in confliction with the objective of achieving and maintaining price stability, support the growth and employment policies of the Government.” Low inflation is among the prerequisites of achieving long-term economic objectives. Therefore, the chief contribution by the CBRT to policies aiming at economic growth and employment would be to maintain price stability.
Ultimately, stable prices help economic agents make well-informed decisions, thereby enhancing the efficiency of resource allocation. In addition, the reduction in the inflation risk premium due to low inflation levels reduces real interest rates, which supports investment decisions.