Turkish Policy Inaction Generates Market Surprise

December 22, 2015

Turkey’s complexity of interest rates — a 7.5% one week repo, 10.75% overnight lending rate, and 7.5% overnight borrowing rate — last got modified on February 24, 2015.  After the prior meeting, hints were conveyed that monetary officials hope to soon start returning to a more conventional single rate objective and that the main one-week repo rate would be raised.  Lira depreciation and inflation of 8.1% that is three percentage points above target as a result appear to justify a tighter stance and had indeed come to be seen ahead of this week’s monetary policy committee’s meeting as a litmus test for the credibility of independently designed monetary policy in Turkey.  Instead, rates were not changed, and a a statement was released that defends the lack of policy change by noting improvement in the pace of bank lending, Turkey’s current account, and the composition of GDP growth.  The statement asserts that the bank’s liquidity stance is already tight and links Turkish policy simplification to continuing “decline in volatility observed after the start of the global policy normalization.”  Following the policy meeting announcement, the lira declined, and market pundits widely expressed suspicion that pressure from the government, whose leadership has lobbied publicly for lower interest rates, had influenced the bank’s decision.

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



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