Central Bank of the Republic of Turkey

January 21, 2014

Monetary officials again left the one-week repo rate at 4.5%, the overnight lending rate at 7.75%, and the overnight borrowing rate at 3.5%.  The most recent changes in these interest rates were a 50-basis point cut in the repo rate and overnight borrowing rate last May and hikes of 75 basis points last July followed by 50 bps in August to the overnight lending rate.  Meanwhile, the Turkish lira has been a recent object of relentless selling pressure even though monetary officials anticipate a diminishing current account deficit in 2014.  The lack of a further increase of the overnight lending rate is suspected of being politically motivated ahead of Turkish local elections in March and a presidential vote in August.  A statement from monetary authorities released today attempts to allay fears of accelerating lira depreciation.  Officials signal that higher market rates are likely ahead and will be partly engineered by central bank money market operations:  “the liquidity stance should be tightened to align inflation outlook with the medium term targets. To this end, interbank money market interest rates will materialize at 9 percent during additional monetary tightening days, instead of 7.75 percent (the marginal funding rate).”  The effectiveness of this strategy is questionable in the face of several negative factors weighing on the exchange rate:

  • Consumer prices rose 7.4% on year in December, nearly 2.5 percentage points above the central bank target.
  • Continuing tapering of Fed quantitative easing will subject many emerging markets like Turkey to capital outflows.
  • The Turkish current account deficit exceeds 7% of GDP.
  • An undercurrent of social restlessness continues in the country.

Copyright 2014, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



Comments are closed.