Turkish Monetary Policy Settings Left Unchanged but Coming Changes Hinted

August 16, 2012

After this month’ policy meeting, the Central Bank of the Republic of Turkey released a statement that stressed a need to preserve two-sided policy flexibility because of the high level of global uncertainties.  The 5.75% level on the main policy reference rate, the one-week repo, was retained at the level such has been since a 50-basis point cut on August 4, 2011.  The one-week repo rate had been slashed earlier from 18.75% to 7.0% between October 2008 and November 2009 and later cut by an additional 50 basis points in December 2010, 25 bps in January 2011, and 50 bps in August 2011.

Monetary policy in Turkey has multiple objectives: the promotion of disinflation, containing excessive domestic credit expansion, and reducing the current account deficit.  The latter two objectives are attacked by varying the corridor between the overnight lending rate and overnight borrowing rate.  That spread had been 250 basis points wide in mid-2010 when the lending rate was at 9.0% and the borrowing rate was 6.5%.  Six months later, officials had engineered a three-fold widening to a spread of 750 basis points by cutting the overnight borrowing rate by 500 basis points to 1.5%.

The overnight rate differential is still abnormally wide at 650 basis points, but today’s statement predicts that such is likely to shrink in the future.  In August 2011, the overnight borrowing rate was increased by 350 basis points to its present level of 5.0%.  In October 2011, the lending rate matched the 350-bp increase and reached 12.5%, but then such was lowered in February 2012 to 11.5%, its present level.  Today’s statement asserts,

In order to support financial stability, the Committee has approved an additional increase in the ratio of allowance to hold Turkish lira reserve requirements in foreign currency and gold, and a limited increase in the coefficient of the option to hold foreign exchange for the Turkish lira reserve requirements (reserve option coefficient) for the first tranche.  In light of these developments, the Committee has indicated that interest rate corridor may be narrowed gradually in the forthcoming period.

The Monetary Policy Committee will meet next on September 18th.

Copyright 2012, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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