Turkish Central Bank Prepares For Exit Strategy in Tiny Steps

April 14, 2010

The Central Bank of the Republic of Turkey had a target overnight borrowing rate of 16.75% as late as October 2008.  Thirteen consecutive monthly reductions later, it was 1025 basis points lower at 6.5%.  The final cut of 25 bps was implemented last November.  After yesterday’s monthly April meeting, monetary officials as expected kept the current rate structure even though inflation of 9.6% is well above a target of 6.5%, and core inflation is likely to climb further in April.  A new statement from the central bank speaks of high unemployment, residual risks to growth that at best will be gradual, and a likely eventual ebbing of inflation to within its target by this time next year.

The statement does advise investors of the coming gradual removal of liquidity-enhancing measures but says rates may stay at current levels “for some time” and low “for a long period.”  Further clarification today indicates a switch of the benchmark interest rate vehicle from the overnight borrowing rate to the one-week repo rate, which happens to be 7.0%.  No specific date for this change was given.  Since the rate structure isn’t being changed but rather the designation of the main target variable, this is a subtle way of indicating preparations for an exit strategy without actually increasing any of the bank’s rates.  In the meantime, reserve requirements will be raised apparently before any rate adjustments are undertaken, but again timing has not been disclosed.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.



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