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 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
Turkey has increased the proportion of deposits banks must store with the central bank, in a move that will soak up some of the liquidity provided since the crisis. The required reserve ratio has increased from 5 to 5.5 per cent for lira-denominated deposits and from 10 to 11 per cent for deposits in foreign currency.
Turkey has not started raising rates since the crisis. Last week, the one-week repo (policy) rate was kept constant at 7 per cent, but overnight borrowing and lending rates were cut 25bp. Read more
Turkey’s monetary policy committee is feeling vindicated. For months it has argued a spike in inflation was temporary: June’s inflation data, released this week, confirmed consumer prices had not just stabilised, but even fell 0.56 per cent last month.
The figures, showing annual inflation eased to 9.1 per cent from a peak of 10.2 per cent in April, boosted the Turkish lira and bonds. Combined with last week’s GDP data that suggested the economic recovery was losing momentum, they have also led most economists to defer expectations of higher interest rates to next year.
The volatility in inflation has been largely due to seasonal swings in food prices – a big component of the CPI basket in Turkey. But the central bank, in comments published on Wednesday, emphasized that core inflation had also eased, and a decline in services price inflation had become more pronounced – with rent inflation, one of the most persistent features of Turkish inflation, at a historic low.
This suggests that the central bank will use its next quarterly inflation report, due on July 27, to lower its forecast for year-end inflation from its previous call of 8.2 per cent. It is also likely to postpone the start of policy tightening, after signalling in its last quarterly report that rate rises could begin in the last quarter of 2010. Read more
By Delphine Strauss
Turkey’s monetary policy committee will breathe a sigh of relief at today’s data showing lower food prices brought inflation back into single digits last month.
Consumer price inflation fell to a year on year rate of 9.1 per cent in May, lower than analysts expectations and down from 10.2 per cent in April. Easing price pressures were largely due to falling food costs, as spring fruit and vegetables came to market and the government eased import quotas to bring down sky-high prices for red meat. Read more
By Delphine Strauss
Turkey’s central bank took the first step in its planned exit from monetary stimulus this week – but it still seems in no hurry to raise interest rates from historic lows. In a technical change it had signalled in a strategy announced last month, the central bank said on Tuesday its policy rate would now be the 7 per cent weekly repo rate, not the 6.5 per cent rate for overnight borrowing.
Durmus Yilmaz, Turkish central bank governor, told reporters on Thursday that banks could soon find financing more expensive. Reuters cites him saying: “From now on, our or the banks’ job will not be easy. We will have to make finer calculations. The banks may have to bring the money left in their hands at the end of the day to the Central Bank at a lower price.”
Yarkin Cebeci, analyst at JPMorgan, said the measure was unlikely to affect markets: “Because the CBRT had become a net lender to the markets, the [overnight] borrowing rate had already lost its relevance as the policy rate. Furthermore, the 1-week repo rate had already stabilized around 7.0 per cent in recent weeks.”
The real question is how soon the monetary policy committee will feel obliged to raise interest rates, with market expectations of inflation running well above the central bank’s medium term targets.
The statement issued by policymakers on Tuesday, when they held rates, suggests that the eurozone’s latest troubles have ended any likelihood of their acting sooner than the last quarter of 2010, as they have
already signalled. Read more
Faith in the lira has slipped as the political power struggle continues, with accusations of an attempted coup, which some say dates back to 2003 and others say never existed. No clarity is needed for traders to want to exit the currency, however. Uncertainty is sufficient incentive.
The lira has fallen about 2 per cent against the euro and dollar this week (see chart). It is likely to continue falling. Bloomberg is reporting a surge in demand for put options on the currency. Put options give the holder the right, but not the obligation, to sell the currency for a specified amount on a set date in the future. Read more
A moderate domestic recovery coupled with ongoing fears for the global economy have led the Turkish bank to sit tight. The borrowing rate remains at 6.5 per cent and the lending rate at 9 per cent. The committee indicated that inflation was forecast to exceed the target this month, and remain above it for some time. This is down to food prices, tax adjustments and base effects (ie. what was happening this time last year).
The central bank of Turkey has left its overnight borrowing rate at an historic low of 6.5 per cent, reports Bloomberg. Last month governor Durmus Yilmaz kept the rate steady, ending a 13-month series of cuts that reduced the benchmark by a total of 10.25 percentage points. The rate is the lowest since the bank started setting it in 2001. Minutes will be released within eight working days.