Middle East

Israel’s foreign currency reserves stood at $70.9bn at the end of December, according to Bloomberg – but they may well be needed.

Central bank governor Stanley Fischer has warned that capital inflows could reverse sharply, leading the Bank to sell its reserves to try to slow any sudden weakening of the shekel. “One of the things that does concern us is that we have a lot of money coming in,” Mr Fischer told Bloomberg Radio in Davos. “If opinions change quickly money goes right back out and it could go out very fast.” Read more

Israel historical interest rate graphic“Monetary policy is still expansionary”, says the central bank, but will be a little less expansionary from February 1 when the base rate rises from 2 to 2.25 per cent. It will be the first rate rise in four months and it is likely more will follow*. The tightening move follows the introduction of a 10 per cent reserve requirement on foreign derivatives, effective January 27.

House prices have risen 17.3 per cent in the past year in Israel, a trend that accelerated last month. “The volume of new housing loans increased steeply in December,” adds the Bank. “The outstanding balance of housing loans at the end of 2010 was 14.7 percent higher than that at the end of 2009.”

It is likely the fear of a housing bubble has prompted the timing of Israel’s rate hike. 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.

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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

Reserve requirements are so in vogue. Israel’s central bank is the latest to adjust their ratio, bringing in a 10 per cent requirement for non-residents dealing in foreign exchange derivatives, specifically FX swaps and forwards. The move will be effective January 27. The bank said:

In the last few months the volume of foreign exchange derivative transactions by nonresidents has increased markedly. A significant part of the increase in nonresidents’ transactions is in short term instruments. This measure will strengthen the Bank of Israel’s ability to achieve the objectives of its monetary, foreign exchange and financial stability policies. 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

A fully electronic trading platform dedicated to Shariah-compliant products has just been launched by Bahraini exchange BFX, which was itself only launched earlier this year. The central bank of the tiny island state will be regulating trading activity on the new platform, e-Tayseer, of the new Islamic finance division, Bait al-Bursa.

e-Tayseer, aimed at the Middle Eastern and North African markets, will initially offer automated murabaha transactions. This is the region’s first exchange-operated platform dedicated to Islamic finance products. Read more