The Kapali Carsi

What will the Central Bank of Turkey do at Tuesday’s rate-setting meeting?

Despite a lot of push from a world-renowned ornithologist friend, I never took up bird-watching. It seemed way too difficult to wait for hours to catch a glimpse of a small unidentified flying object and try to identify it.

I was in Ankara on March 15 to, among other things, give a guest lecture at a class in the Middle East Technical University on “Central Bank watching,” (i.e. how market economists follow the Central Bank of Turkey). Since the Bank’s monthly rate-setting meeting is being held tomorrow, I should summarize my lecture.

Here’s the intro. to my latest Hurriyet Daily News column, I have two goals: First, I guess what the Central Bank of Turkey will to at Tuesday’s rate setting meeting. But I would like to be a bit convincing, and so I explain my reasoning in detail.  Second, I aim to show that the Central Bank’s multi-instrument, multi-target framework is confusing and has caused, among other things, market economists to disregard inflation as one of the main items on the Bank’s agenda. The Bank is well aware of this: Central Bank of Turkey Governor Erdem Basci refused the “bureaucrat of the year” award of Ekonomist magazine, saying he would accept the prize once inflation fell to the Bank’s target of 5 percent. Other than being true to his name (Erdem means virtue), the Governor is also trying to convince markets that they still care about inflation. But it may be too late for that:(

Anyway, you can read the whole thing at the HDN website. I have a couple of extra comments, but before that, I should note that this is in no way a very radical/counter call. In fact, almost all the economists surveyed by business channel CNBC-e expect no change in rates & small hike in reserve requirement ratios (RRRs). There are a couple of economists who expect a cut in the lending rate, i.e. the ceiling of the interest rate corridor, but I am not sure if the Bank would like to narrow the corridor. They could of course cut the borrowing rate, i.e. the floor of the corridor, as well, and simply shift down the corridor, but as I argue in the column, domestic and global conditions do not warrant a cut in that rate. You could argue that the solution to the Cyprus problem has paved the way for the borrowing rate cut, but the confusion created by Eurogroup head Dijsselbloem today should be more than enough to convince the Central Bank to stay put for the moment.

As for the RRRs, today’s bank data from the banking regulator (BRSA) showed that credit growth continues to be strong, so I still believe the Bank will undertake 25-50bp hikes in RRRs.

Finally, what would be the market implications if I am right- or wrong?

Treasuries performed poorly today (the benchmark and 10-year hit 6.34 and 7.25 percent respectively),  causing all sorts of rumors- for example, that some are betting the Central Bank would raise rates tomorrow. I don’t agree. First, as you can see in the graph below, Treasuries have been performing poorly for a while. As I mentioned in the column, there were $ 1.6bn of outflows to weeks ago, and there wasn’t much demand in last week’s auctions.

Moreover, the Central Bank has already been tightening for a while via open market operations, so I would not expect further tightening via rates.

Having said that, such an unlikely move cause bond rates to go up further….

2 Responses to “What will the Central Bank of Turkey do at Tuesday’s rate-setting meeting?”

Darius WilkinsMarch 25th, 2013 at 8:40 pm

I have been wondering for a while now about the make-up of Turkey's trade. At this point, virtually all of Turkey's neighbors are in some sort of distress economically (maybe not Armenia?), and I read often that the Syrian conflict has depressed the economy to Turkey's southern areas some. Don't a lot of people really rather have unflexible needs for credit, such that a rate hike might be a bad idea in the medium term (thinking of that abominable hike from Tichet before everything went to pieces)?

Emre Deliveli edeliveliMarch 25th, 2013 at 10:39 pm

Yep, a hike would be a very bad idea at this point, but so would be cut- so staying put makes sense.

BTW, despite constant decrease in the last few years, the bulk of Turkey's trade is still with Europe, esp. E.U…. Trade with neighbors (Iraq) increased only recently….

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