Central Bank of the Republic of Turkey Hoping it’s Done Enough to Quell Lira Crisis

February 18, 2014

For the past couple of years, Turkish monetary policy has been a confusing stew, with a variety of policy tools chasing a variety of separate policy goals.  Some interest rates have been raised, others cut, and the authorities have also monkeyed around with reserve requirement changes to the puzzlement of investors.  With little confidence in policymaking and both inflation and a current account deficit exceeding 7% of GDP, the Turkish lira and financial markets became a prime object of the investor stampede out of emerging markets especially after credit policy was left unchanged at the regularly scheduled January meeting of Turkey’s Monetary Policy Committee.  An emergency meeting was held late in the evening of January 28 that resulted in massive interest rate hikes.  The one-week repo jumped 550 basis points to 10.0%, and the overnight lending and borrowing rates were lifted respectively by 425 bps to 12% and 450 bps to 8.0%.

At its February meeting today, the MPC took no further restrictive action on rates and in two ways discouraged markets from expecting additional steps.  First, substantial improvement was predicted for the current account.  Second, the late-January rate hikes were characterized as “strong and front-loaded” in a released statement.  To be sure, the statement promises to maintain the new policy settings “until there is substantial improvement in the inflation outlook.”  Without generalized lessening speculation against all emerging markets and specific evidence of falling inflation and a less burdensome current account shortfall, a need for more monetary restraint to support the lira is apt to arise.

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



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