Turkey interest rates

Turkey’s banks are having a bad time. The sector’s 16-bank MSCI index fell by as much as 15 per cent during the past month, hitting a price-to-book ratio of less than 1 for the first time in five years.

Perhaps that isn’t surprising given that higher interest rates, slower growth and a cheaper lira are likely to persist, while credit expansion won’t sustain its rapid pace of the past decade. In 2013 alone the volume of loans rose by just shy of 30 per cent and the ratio of banks’ loans to deposits currently stands at 107.7 per cent, after breaching the 100 per cent level in 2013 for the first time in at least a decade.

So, how well prepared is the financial system for the end of a world of easy money and abundant capital inflows?

 

In a moment of drama at midnight on Tuesday, Turkey’s central bank performed a volte face, increasing interest rates across the board where it had previously been reluctant to raise them. It more than doubled one key rate.

It was a striking move, given the political and financial backdrop: prime minister Recep Tayyip Erdogan has long made clear his opposition to high interest rates, while investors had become worried about Turkey and other emerging markets, writes Daniel Dombey in Istanbul.

 

After hitting all-time lows against the dollar, the lira has staged a big comeback. Here’s the essential reading: 

Is Turkey about to embrace orthodoxy? The timing of Tuesday’s eagerly-awaited midnight announcement from the central bank’s monetary policy committee suggests the answer may be, at best, “not entirely”. Indeed, some analysts see the choice of midnight as an indication that the bank is preparing to bring in capital controls, in which case the answer would be “not on your life” – although Erdem Basci, central bank governor, has explicitly ruled that out.

As Timothy Ash at Standard Bank put it, what investors want is “plain vanilla central banking, with no further use of smoke and mirrors”. But will they get it? 

The Turkish lira hit the latest in a series of all-time lows against the dollar on Monday when it fell to TL2.2502, on a day when the country’s new economy minister said a further slide would not be a problem and called on the central bank not to increase interest rates.

An interest rate rise might in normal circumstances be expected at the bank’s monetary policy committee meeting on Tuesday.

But this is Turkey. 

Has there just been a landmark change in how Turkey runs its economy? It depends on how much importance one gives to what the country’s central bank says rather than what it does. It also depends on how much of a free hand it has.

There’s clearly been a noteworthy shift – the bank, widely known for its unorthodox stance (read: its reluctance to raise interest rates) tightened policy this week in a way that had some analysts clamouring that the days of unorthodoxy were over. 

It may or may not be a coincidence that the Turkish lira touched a record low a day after the central bank decided that defending the currency was less important that keeping interest rates in check.

But what is more important is the thinking behind Ankara’s new approach – whether it is prompted by technocratic considerations or the result of political constraints – and whether it is likely to prevail. 

Turkey’s use of a broad “interest rate corridor” as an instrument of monetary policy was controversial when it was first introduced in late 2010.

Two and a half years later, in spite of a broad consensus that this unconventional measure has been surprisingly effective, it remains no less controversial. 

Two key EM rate decisions today in Turkey and Hungary, and the first is in: Turkey’s central bank has raised its overnight rate by 75 basis points to 7.25 per cent, a bigger increase than expected by many. Read more over on FastFT.

Later on Tuesday Hungary is expected to push its cutting cycle further. Why are these central banks taking such different paths? In a nutshell: it’s the current account. 

Some respite for the Turkish lira on Monday after a surprise statement by Erdem Basci, governor of the central bank, saying the bank would not allow global monetary and fiscal policy uncertainty to have an impact on “price stability and financial stability in Turkey”.

Has Basci joined the “interest rate lobby” so despised by prime minister Recep Tayyip Erdogan? 

On Thursday, as Daniel Dombey reported on beyondbrics, there was some respite for Turkey as the pressure on the lira eased a bit after Ben Bernanke‘s comments.

But come Friday, the currency was in the firing line yet again, falling to around 1.96 to the dollar at one point. Investors are pushing yields on the two year debt up and up. A big test is coming for Erdogan’s opposition to raising rates. 

Turkey’s central bank cut interest rates by more than expected on Tuesday – a move that highlighted pressures from both far afield and closer to home.

In some ways, the further-flung-factor was the more straightfoward one: the inflationary stance of Japan’s new prime minister is having a significant impact on Turkish monetary policy. What is more controversial is the role of Turkey’s own premier. 

Turkey’s central bank cut its overnight lending rate by 1 percentage point on Tuesday to 7.5 per cent but kept its overnight borrowing rate and its repurchasing rate – its main policy rate – on hold at 4.5 per cent and 5.5 per cent, respectively.

It is a typical example of what the bank calls its ‘flexible’ monetary policy, designed to adapt to uncertainties in the global economy. Analysts mostly call it ‘confusing’. 

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.