An Indirect Central Bank Approach to Containing Turkish Lira Depreciation

April 22, 2015

2015 is not even 31% complete, yet the beleaguered lira has fallen 15% against the dollar.  The danger is that currency weakness will lift inflation, which in March stood at 7.6%.  The currency’s weakness was amplified by cuts in the one-week repo rate of 50 basis points in January and 25 bps in February on top of 175 basis points of reduction last May-July.  In February, overnight lending and borrowing rates were cut, too, by 50 basis points and 25 bps, respectively.  At this month’s meeting, the three interest rates were not changed and respectively remain at 7.5%, 10.75%, and 7.25%.  This poses continuing risk to the lira, but monetary officials have been under pressure from critical government leaders, especially in light of the approaching parliamentary election on June 7.

As a consolation to contain further lira depreciation, central bank officials released an upbeat statement, stressing that the interest rate level represent a cautiously prudent monetary stance, complemented by anti-inflationary fiscal and macroprudential measures.  More importantly, a few unconventional policy measures were introduced to discourage lira selling.

  1. The remuneration rate for the required reserves maintained in Turkish liras has been raised by 50 basis points.
  2. In line with global interest rate developments, the rates applied to banks’ one week maturity borrowings from the central bank have been reduced from 4.5 percent to 4 percent for USD and from 2.5 percent to 2 percent for EUR, effective from 24 April 2015.

Private analysts generally doubt these steps will stop the lira’s slide and suspect that interest rates will have to be jacked higher once the elections have passed.  The statement’s forward guidance will hardly quell such speculation.

Future monetary policy decisions will be conditional on the improvements in the inflation outlook. Inflation expectations, pricing behavior and other factors that affect inflation will be monitored closely and the cautious monetary policy stance will be maintained, by keeping a flat yield curve, until there is a significant improvement in the inflation outlook.

The next two interest policy statements are scheduled for May 20 and June 23.

Copyright 2015, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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