The Central Bank of Brazil shocked markets in August by lowering its benchmark rate to 12 per cent. Will it cut again this Wednesday? Analysts expect so.
The Central Bank of Turkey, another of the emerging market central banks that has been taking economists by surprise by loosening policy, votes on Thursday, as does the Central Bank of the Philippines. Read more
Luckily for this blog, monetary policy is no longer as “boring” as Sir Mervyn King would like.
Still, it remains predictable enough that economists are rarely surprised by decisions. Especially for those central banks that target a certain level of inflation. Recently, however, most have been getting it spectacularly wrong on some of the key emerging market votes, notably Turkey’s and Brazil’s rate cuts.
They might have called it right had they read this collection of papers, published by the Bank for International Settlements yesterday. Read more
The Bank of Israel – one of the first to raise rates following Lehman Brothers’ failure – on Monday became the latest to override domestic price pressures and cut on the back of concern over the global outlook.
Following the lead of the central banks of Turkey and Brazil before him, Stanley Fischer, the Bank’s governor and sole rate-setter, shaved a quarter point off Israel’s benchmark interest rate to leave it at 3 per cent, despite inflation rising by half a percentage point to 3.4 per cent last month, above the 3 per cent upper limit of the inflation target range.
Public outcry at high inflation – particularly food price pressures – has inspired Facebook groups that have attracted over 100,000 members. And rising house prices have prompted more than a quarter of a million Israelis to take to the streets. (The central bank maintains that its measures, along with more house building, will slow the pace of house-price inflation).
Growth – at 2.4 per cent in the second quarter (annualised) – is relatively high, and unemployment – at 5.5 per cent – low.
All of which has meant that analysts – the vast majority of which had forecast a rate hold – were taken aback.
So why has Mr Fischer cut rates? Read more
Central bankers this week have acted on fears that the global outlook could weigh on domestic growth.
The Central Bank of Turkey’s shock decision on Thursday to cut its policy rate to an all-time low in the face of strong growth and above-target inflation shows just how pronounced those fears are.
Japan and Switzerland have both attempted to counter their currencies’ rapid appreciations over recent weeks, which have occurred on the back of events in the US and the eurozone. Read more
Turkey’s banking industry could be damaged unless the central bank reverses last year’s decision to stop paying interest on required reserves, the head of one of the country’s biggest lenders claims.
Suzan Sabanci, chairman of Akbank, told the Financial Times that new rules requiring banks to lodge 15 per cent of short-term lira deposits with the central bank risked fundamentally weakening banks unless they received interest in compensation. “The government is trying to be cautious that the economy doesn’t grow too fast. And I agree with that,” she said. “But we need to be recompensed. They should start paying interest in six months’ time.” Read more
Ankara has sharply raised the proportion of short-term deposits lenders must keep with the central bank, while holding policy rates steady.
Turkey’s reserve requirements differ by maturity of deposit, and the central bank’s strategy has been to tighten requirements for potentially destabilising short-term deposits, while loosening them to encourage long-term deposits. The chart, right, shows how the structure of reserve requirements has changed since the new policy began in December (dark blue line), at which point all ratios were 6 per cent. Read more
Turkey’s central bank stepped in again this week to clear confusion over the effects of its unorthodox monetary policy, after the release of data that appeared to contradict comments made by officials. The trouble was caused by balance of payments data: it showed portfolio inflows of $2.3bn in January, higher than a year earlier and at odds with official claims that some $10bn of “hot money” had left the country since December, when the central bank began “quantitative tightening” to deal with macroeconomic imbalances.
Two clarifications from the central bank have cleared up the discrepancy. The balance of payments data showed foreign investors had sold out of Turkish equities since November, while increasing their exposure to debt instruments. But the figures did not include money market transactions, mainly in the form of swap operations. Here, the central bank said, there had indeed been an outflow of $11.5bn since November. Read more
Loan growth is slowing in Turkey, backing up claims by Turkey’s central bank governor that its unorthodox monetary policy is working.
Data from Turkey’s banking watchdog, BDDK, showed total banking sector loans rose 2.8 per cent to February 18. This equates to about 21 per cent over a year, well within the bank’s target 20-25 per cent loan growth. It also represents a significant drop from the annual rate of 35.6 per cent on the year to February 18. The actual annual volume of banking sector loans to February 18 was 550.3bn lira. Read more
Loan growth is losing pace and $10bn short-term capital has left Turkey since the start of its new interest rate policy in December, central bank governor Durmus Yilmaz said Friday. Despite this, the current account deficit – one of the principal targets of the measures – will continue to rise in the first quarter due to base effects. Mr Yilmaz added he did not foresee a change in policy when his governorship ends in April.
The statements add up to declaration of success – but there was a caveat. Oil prices, driven higher by events in Libya, created a “new situation”, Mr Yilmaz admitted. Turkey’s rate-cutting, reserve-requirement-raising policy has so far been possible thanks to falling inflation and fairly high unemployment. (Rate cuts in an inflationary environment would have been far more dangerous.) If oil prices were to remain high, they would create an inflation risk that might constrain Turkey’s monetary plans. For now, as long as Saudi Arabia and its oil reserves stay out of the current turmoil, many believe the oil price shock will be short-lived.
No reversal in Turkey. The central bank held rates at its latest policy meeting, hinting it would continue with its new monetary policy, data permitting. Since December, the Bank has been cutting rates and raising reserve requirements – a combination that they say has a tightening effect overall. Early indications suggest the policy is working.
The measures taken by the Central Bank since November are reducing macro-financial risks by leading to a more balanced growth path, mainly through a slowdown in import growth… Read more
Early indications suggest Turkey’s unorthodox monetary policy is working: the maturity of deposits held at banks seems to have lengthened since December and consumer credit is falling. With a weakening lira and falling inflation, it is likely the ultimate objective – of reducing the current account deficit – is also being achieved.
So, deposit maturities. I confess I don’t have exact maturity data, but my conclusion is implied by the chart to the right. The chart shows the split of lira-denominated deposits at both private and public banks in Turkey.
The thin yellow strip represents lira deposits by non-residents and since the data do not split them further we shall ignore them for this analysis. The blue area represents “sight” deposits (i.e. like a current account, you can grab your money and run). These, then, have the minimum possible maturity (zero). The red area are “time” deposits, which are placed with the bank for a certain time. They might be a month or ten years, the data do not tell us. But they definitely have a longer maturity than sight deposits. And the proportion of sight deposits has fallen substantially since December, from 15.9 to 14.5 per cent. Read more
Incentive realignment continues at the Central Bank of Turkey. Reserve requirements have been raised as signalled last week – though by more than many will have been expecting.
Turkey is trying to lengthen the maturity of deposits flowing into the country, as it explained at the outset of its new strategy in December: “The fact that maturities of liabilities are shorter than those of assets in the Turkish banking sector exposes the sector to liquidity and interest rate risk, which increases the sensitivity of the banking system to shocks,” it said.
Turkey’s rate cut yesterday will be followed by another raise in reserve requirements in the coming days, continuing the central bank’s plan to discourage short-duration capital flows. Bloomberg news wire reports:
The Turkish central bank’s decision to reduce the benchmark interest rate was unanimous, Turalay Kenc, a member of the Monetary Policy Committee told Bloomberg HT television. Read more
Turkey’s central bank has just cut their benchmark rate 25 basis points, building upon moves last month that cut the same rate 50bp and raised reserve requirements. The two-pronged move was intended to weaken the lira, make exports more attractive and thus reduce the current account deficit – a blight on an otherwise booming economy.
The particular problem with Turkey’s bank reserves is their maturity profile, which is quite short-term, making the country vulnerable to external shocks. Rather than focusing on inflation and growth, a great deal of attention in Ankara must be focused on securing the next slice of funding. Encouraging longer-term maturities is a smart move; financial stability increases in proportion to the average maturity of deposits. Read more
As expected, Turkey’s central bank has cut its key rate as part of a two-pronged strategy to address hot money and inflation. The following information is from the Bank, courtesy of Google translate:
“The bank said the measures, taken in tandem with hikes to the lira required reserve ratio due to be announced on Friday, would not have an expansionary effect on monetary conditions,” reports Reuters. Read more
Markets are already expecting a cut today: yields on Turkish government bonds are at record lows following hints of a new strategy from the country’s central bank. That strategy could include cutting rates to combat hot money, while raising reserve requirements to mop up the extra liquidity that this would create.
Lex points out the irony of cutting rates to slow the economy in an article entitled: Turkey: an anti-stimulus stimulus. The move, if it happens, is quite a gamble. Cutting rates, with the threat of more to come, may discourage yield-hungry foreign investors, as intended. But will government and the banks play their part in restraining the consumption that will be encouraged by lower rates? It’s possible, says Lex, “but such virtue is unlikely with an election looming and little tradition of financial restraint.” If the plan backfires, expect inflation. Read more
Cutting rates while increasing reserve requirements is the best way to tackle Turkey’s current account deficit, the central bank has said. The rate cut hint has sent sovereign bond yields to historic lows.
“Tightening tools other than interest rates to prevent loan acceleration on the one hand, and gradual decreases in short-term interest rates to limit the appreciating trend in the forex rate, are the ideal policy strategy against an increasing current account deficit,” deputy Governor Erdem Basci said in a presentation. Read more