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.
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.
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.
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.
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.
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
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.
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.