Turkish Central Bank Hikes Overnight Lending Rate to Support Lira

October 20, 2011

Turkish monetary authorities essentially did a mea culpa today, taking some responsibility for hurting inflation expectations and the lira with earlier policy actions.

The Central Bank of the Republic of Turkey overnight lending rate was increased 350 basis points to 12.5%, while the overnight borrowing rate was left unchanged at 5.0%.  Their spread of 750 basis points is restored to its pre-August 4 width as a result.  At an unscheduled meeting in early August, the borrowing rate was raised by 350 bps to 5%, while the lending rate stayed at 9%.  At that same meeting 2-1/2 months ago, officials also cut the one-week repo rate unexpectedly by 50 bps to 5.75% in a pre-emptive attempt to limit any contagion in Turkey from the euro debt crisis.  Normally the 1-week repo is the main policy rate, and it had been reduced by 50 bps to 6.5% in December and another 25 bps in January of 2011.  Because of increased reserve requirements implemented in December 2010 and March 2011, officials claimed that their policy stance had actually tightened in spite of the reduced interest rate.

All that monetary razzle dazzle backfired.  When the repo rate was cut last December and January, the monetary authorities played down the risks to inflation, which was seen as rising in the very short term but then falling.  Officials were confident that second-order inflationary measures would be contained.  Today’s statement, by contrast, projects a “significant” rise of inflation in coming months, and instead of a hint of more support for economic growth in the future, a suggestion is planted that other steps will be taken if markets don’t settle down.  A sharp drop in the lira over the past year, which accelerated after the August 4 steps, is the factor behind rising inflation expectations and the worse inflation prognosis, and ending the exchange rate’s depreciation is the principal objective of today’s about-face in policy.

Copyright 2011, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



One Response to “Turkish Central Bank Hikes Overnight Lending Rate to Support Lira”

  1. Companies producing in Turkey should anticipate lower exchange rate-adjusted costs through next year, while companies selling indirectly to the market should anticipate reduced buying power for dollar-denominated goods. Fahhan Ozcelik, FSG Expert Advisor, also recommends that MNCs operating in Turkey take advantage of the government’s planned incentives for local exporters. One way MNCs can do this is by partnering with local suppliers for semi-finished goods, especially in industries such as textiles, motor vehicles, and electrical machinery.