Posted on January - 21 - 2011
Turkey: Confusion in monetary policy realm continues
Details and outlook
Today’s rate announcement in Turkey was an historic one, with respect to its timing – it was the first time the statement was released at 13:00 CET. In future this will be the time for rate announcements, allowing markets to react during European trading hours on the day of announcement. TCMB delivered a 25bp cut in the benchmark one-week repo rate, while the overnight rate corridor between borrowing and lending rates, as well the Late Liquidity Window rate were kept unchanged. The bank signalled the forthcoming additional RRR hikes that have been employed to counteract the rate cut effect and curb growth in credit supply.
Going into the rate announcement, the median surveyed analyst opinion was pointing to unchanged rates and this was also our stance. It is worth noting that the surveyed opinions had markedly changed in the days leading up to today’s rate decision, as concerns over Turkish credit conditions potentially loosening, significant depreciation in the lira and recent comments by the TCMB had led many to reverse their respective rate outlook. The fact that the benchmark two-year government yields have traded over 40bp higher from the record low closing of 6.90% on 5 January was also a clear indication of the markets’ positioning toward unchanged rates.
Against the backdrop of the above circumstances, TCMB’s decision to shave its policy rate by an additional quarter of a percent came as somewhat of a surprise to the markets, although from a historical point of view a 25bp cut marks a rather limited rate action. More importantly, the concurrent references to further RRR hikes were made to deliver a key point that the net effect of this policy mix – explicitly seen as an optimal policy medium under current monetary circumstances – would be of a contractionary nature. Of further interest is the reference to “hikes in required reserve ratios for short-term liabilities…” where the term liability in place of deposits translates into uncertainty as to exactly what instruments the RRR increases will be directed to and will no doubt keep markets on their toes. Little else has changed in TCMB’s broader rhetoric as economic activity levels are still seen as robust, credit here going to strong domestic demand. Still elevated unemployment as well as lacklustre industrial capacity utilisation levels stemming from weak external demand are highlighted as sources of continued concern. In this connection, the bank continues to expect a sharp fall in inflation in January and below target price growth in the rest of Q1, increased volatility in prices in Q2 onwards and attainment of a year-end target rate of 5.5%.
The immediate market reaction to TCMB’s statement was one that took significant toll on the lira as the markets bid EUR/TRY to one-year highs. On the yield side, a volatile session ended with the yield curve steepening notably, in a move that points toward growing inflationary concerns stemming from the successive rate cuts. The broader markets’ punitive reaction can be seen as further erosion of TCMB’s current policy credibility. At this stage, we re-emphasise our previously communicated concerns over the sustainability of Turkish central bank’s conflicting policy aims and continue to observe the broader Turkish credit and monetary conditions closely for signs of further expansion.
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