By Yeliz Candemir and Emre Peker
ISTANBUL—Turkey’s central bank trumped market expectations with a surprise interest-rate cut on Tuesday, sending mixed policy signals amid waning foreign investor appetite and a challenging economic outlook.
Officials in Ankara cut the overnight lending rate to 7.50% from 8.50%, thus reducing the ceiling of the central bank’s interest-rate corridor, the Monetary Policy Committee said. The rate-setters maintained the 4.50% overnight borrowing rate—the corridor’s floor—and the one-week benchmark repo rate of 5.50%. The central bank move went against forecasts by all but two of the 10 economists surveyed by The Wall Street Journal.
The decision, widely characterized as “confusing” by economists, comes just as Turkey’s central bank had started to regain investors’ trust. Gov. Erdem Basci, recipient of the “Central Bank Governor of The Year” award by The Banker magazine in January, had toiled for two years to convince markets that his policies curbed credit-fueled economic growth, slowed inflation and shrunk record short-term foreign funding needs—all threats that Turkey’s economy faces again today.
“The central bank will need to work hard to explain the latest move,” said Tim Ash, head of emerging markets at Standard Bank PLC in London. “It is running a very nuanced policy at present and a lot gets lost in translation.”
As Mr. Basci tried to rebalance an overheating $800 billion economy in the past two years, he was widely criticized for his unorthodox policy mix—including an interest-rate corridor, a benchmark rate, shifting reserve requirements, liquidity management and currency targeting.
Now, the central bank’s penchant for the unusual may spook international investors amid global financial uncertainties like the tiny yet unnerving bailout of Cyprus. Analysts say that would threaten Turkey’s ambition to boost economic growth to 4% this year from 3% in 2012 because the country relies heavily on foreign funding to make up for a lack of domestic capital.
Yet the healthy recovery in domestic demand is also triggering a surge in consumer lending—the driver of Turkey’s average 9% economic growth levels in 2010-11. And as the central bank seeks to tweak credit growth toward commercial loans, Gov. Basci is deploying complicated policy tools to try and tighten the central bank’s stance while also seeking to protect economic growth.
“The combination of increasing difficulty in attracting capital inflows and accelerating credit growth means the central bank will maintain its tightening bias,” said William Jackson, an economist at Capital Economics in London. “Turkey’s external vulnerabilities haven’t gone away—in fact, they are among the largest in the emerging world.”
Indeed, foreign investors sold $1.6 billion of Turkish government bonds in the week ended March 15, the biggest net weekly sale since 2007, according to Capital Economics. Meanwhile, bank lending has increased by 24% in 2013, driven partly by consumer credit and expanding nearly twice as fast as it did at the end of last year, according to central bank data.
Moreover, booming consumer lending threatens to boost Turkey’s current-account deficit, which declined to a still unsustainable 6% of gross domestic product in January from a peak of 10% in 2011. Economists say surging domestic demand and increasing short-term foreign funding needs on the back of rising imports may also trigger higher inflation, which declined to 7% in February from 11% last April.
“The central bank seems uncomfortable from the uncertainty triggered by the slowdown in foreign inflows. It looks like banks will become more reliant on the central bank for funding, which increases uncertainty and costs,” said Gizem Oztok Altinsac, an economist at Garanti Securities. “Thus, it seems the central bank is seeking to slow credit growth through this avenue, but we still think there’s a risk that this change in tactic won’t work.”
via Turkey’s Central Bank Policy: Lost in Translation – Emerging Europe Real Time – WSJ.
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