The Kapali Carsi

Turkish Monetary policy’s ‘Groundhog Day’

I wasn’t planning on writing about monetary policy, but reader comments seem to hint that some of the steps taken by the Central Bank at its rate-setting meeting on Jan. 22 were unclear.

Here’s my latest Hurriyet Daily News (HDN) column, on last Tuesday’s Central Bank of Turkey rate-setting decision, where I go over the different actions of the Bank. You can read the whole thing at the HDN website, but basically Tuesday’s actions hinted that monetary policy would be similar to 2011- and so the “Groundhog Day” reference.

I had already summarized the rate decision in a post last Tuesday, and I have some additional comments there, especially on the one-pager accompanying the rate decision. I’d like to make a couple of additional points here:

First, the big question on everyone’s mind is how much the Central Bank will increase required reserve ratios (RRRs) this time. As you can see in the second graph in the column, there was a significant RRR hike in 2011. But as you can see in the graph below, credit was growing at 40 percent yoy at the time, while credit growth is around 20 percent nowadays. So I expect RRR hikes to be gradual and measured this time around.

Second, after reading my column, my friend Ozlem Derici, chief economist of Ekspres Invest, made an important point: RRR hikes did not work in 2011 because the Central Bank had to give to the markets the exact amount it was pulling via RRRs. This was because the funding cost was fixed at 5.75 percent, the one-week repo (and the policy rate). But nowadays the Central Bank uses quantity auctions, with varying interest rates- that’s the concept of the effective funding rate. While I agree with Ozlem, my point in the column that banks will be induced to switch from bonds to loans in a low-interest environment is still valid.

Third, I’ve been asked whether monetary policy is net-net contractionary. Judging by OMOs, the answer is yes, I guess…

BTW, Basci gave a couple of interviews in Davos, but nothing really new there. The more important announcements were from economy tzar Ali Babacan, but you have to wait for my next post for that…

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