Tag: central bank

By EMRE PEKER

Which one to follow? Turkey uses a wide range of interest rates and even specialists are confused about which one to focus on. Agence France-Presse/Getty Images

ISTANBUL–Turkey’s central bank has finally caved in. Having failed to convince critics that its “unorthodox” monetary policy can slow inflation, it opted for some transparency on the issue. The outcome? It sowed more confusion.

At a regular policy meeting Wednesday, one day after its latest monetary policy decision, policymakers in Ankara split economists with their message. They garnered resounding praise for clarifying their stance from some, and something approaching exasperation from others.

Economists at the gathering said officials acknowledged that annual inflation, at 7.7% in October, may be higher at the end of the year than the 6.8% forecast. Policymakers reiterated their commitment to fighting inflation, warning that consumer price increases may miss expectations by half a percentage point.

The central bank has been tightening its policies to that end since May, effectively raising borrowing costs for banks from record lows by 3.5 percentage points to more than 7%, officials told attendees.

But that’s not easy to see under a policy framework that governor Erdem Basci introduced in October 2011. With that, the central bank had been using the benchmark rate along with an interest-rate corridor that currently ranges from 3.5% to 7.75% to vary borrowing costs daily. Mr. Basci tries to manage a broad remit ranging from credit growth to volatile international capital flows, inflation, economic growth and currency stability by controlling the amount of cash in the financial system.

But even true specialists have long been confused about which rate to focus on. On Wednesday, policymakers tried to answer that question, urging market participants to stop watching the central bank’s benchmark one-week repo rate and instead focus on the interbank overnight lending rate, according to economists who attended the meeting.

That renders the 4.5% policy rate irrelevant and thrusts the interbank rate that’s currently at about 7.15% to the forefront as officials seek to anchor policy expectations. The central bankers also reaffirmed the Monetary Policy Committee’s decision on Tuesday that interbank borrowing costs will inch up to 7.75%.

“[This is a] very clear system and eliminates the downward flexibility in the monetary policy,” Erste Securities Economist Nilufer Sezgin said in a note from the meeting. “The central bank of Turkey is tighter and more orthodox.”

Policymakers’ expectation that Turkey’s $786 billion economy will expand by 4% this year–more than the government forecast that was revised down to 3.6% in October–is also giving Mr. Basci some wiggle room to tighten monetary policy and target inflation.

But since the central bank’s highest interest rate is barely above current inflation levels, many economists are still puzzled about how policymakers can deliver additional tightening without raising rates in a more traditional manner. And that’s something the central bank is reluctant to do, especially with elections coming up.

And policymakers didn’t provide any hints on what would be used as the reference rate if the central bank opts to further raise borrowing costs.

“This meeting marks an end to the central bank of Turkey’s unorthodox policy experiment–or that is what the central bank is telling us at the meeting,” said Tim Ash, chief emerging-markets economist at Standard Bank Plc. “Again, participants here are struggling to figure out whether the new monetary policy mix is here for to stay, or we will see a new mix again further down the line. The central bank seems to be struggling to sell the move to orthodoxy.”

via Turkey’s Central Bank Aims for Clarity and Achieves Confusion – MoneyBeat – WSJ.

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.

Turkey’s central bank specialises in Solomonic decisions. Like the Biblical Jewish king, the bank’s approach to thorny monetary and financial questions is to give a bit to both sides in a dispute. The question, is, however, whether it cuts in equal halves.

The bank displayed its split screen approach again on Tuesday, announcing it was inching down interest rates by 25 basis points (bringing its borrowing rate to 4.5 per cent and the lending rate to 8.5 per cent), but also introducing tougher reserve requirements on banks. This followed a near identical decision in January.

In the eyes of Tim Ash at Standard Bank, such hyperactive moves help put the bank “probably at the front of the pack in running the most complicated monetary policy the world has ever seen.” In a less confused vein, he adds: “The combo of lower policy rates to try and deter hot money inflows and prevent the over appreciation of the lira and macro prudential policy to counter the impact on domestic credit growth continues.”

The tactic of cutting interest rates while putting measures in place to stop bank lending getting out of hand is one Ankara started a few years ago as it wrestled with the country’s then runaway economy.

Today, however, the Turkish economy has slowed down considerably. In Tuesday’s note, the bank says “rebalancing between the domestic and external demand continues as envisaged”, adding that domestic demand is following “a moderate pace”.

That loss of economic speed infuriates some politicians, notably Zafer Caglayan, economy minister, who complains that growth last year was just 2.5 per cent, in comments clearly directed at the central bank.

The minister argues that the country could be growing at 6 per cent without inflation or the current account deficit being a concern.

Nor are Ankara’s central bankers necessarily immune to calls for higher growth. Murat Ucer of GlobalSource Partners in Istanbul notes a certain asymmetry in the bank’s approach.

To begin with, there is the question of whether the growth in lending or the currency’s valuation is the more pressing issue.

Ucer sees a contrast here. First there is credit growth – currently at an annualised rate of over 20 per cent compared with a target of 15 per cent. Then there is the lira’s real exchange rate, which he notes is “barely past” the 120 mark (in an index the bank calculates) that the bank holds warrants monetary easing to bring the currency down.

He adds: “The “mix” that entails lower rates/higher reserve ratio requirements on the Turkish lira side is also not doing much – at least so far – in curbing credit growth.”

Inflation expectations also play a big part. Ucer notes a difference between the language of the bank’s January statement, which said core inflation indicators were “expected to continue their downward trend” and Tuesday’s announcement, which held that they were “expected to follow a mild course.” In theory “a mild course” could be in either direction.

As a result, Ucer detects a “pro-growth bias” in the bank’s deliberations.

That may not be too surprising. At some point you have to decide whether to blow on the fire for heat or on the soup to cool it. But it is not to everyone’s liking.

For instance, Ilker Domac at Citibank predicts that the bank will have to return to orthodox monetary policy, because of factors such as inflation, which pushes the real exchange rate ever higher as the nominal exchange rate fails to keep pace. It could be a question of history repeating itself, he argues.

After all, last time around Turkey’s bout with unorthodoxy ended with a dramatic increase in interest rates.

via Turkey: the central bank and conflicting signals | beyondbrics.