The Kapali Carsi

Is the music about to stop again?

Yep, at least according to the Central Bank of Turkey:

Jeremy Irons’ character in the movie Margin Call, the CEO of an investment bank, reveals at one point why he “earns the big bucks”: “I’m here for one reason and one reason alone. I’m here to guess what the music might do a week, a month, a year from now. That’s it. Nothing more.”

Since I don’t know any such hotshots, the Central Bank of Turkey will have to make do. At Tuesday’s rate-setting meeting, the Bank surprised everyone by lowering its overnight lending rate a full percentage point and not hiking lira reserve requirement ratios. You are more than welcome to read the details in my Economonitor blog, but in essence, the Bank changed its strategy because “there is a deceleration in capital inflows in the recent period.”

Here is the intro. to my latest Hurriyet Daily News column, where I discuss whether the music will/could stop soon, summarizing what a few institutions/analysts think. You can read the rest at the HDN web site.

Note that the weekly flows data from the Central Bank, which were released Thursday afternoon, lend further support to the Central Bank’s view. Here’s my friend Ozlem Derici from Ekspres Invest: “Foreign investors further reduced their total bond and equity holdings by US$263mn within the week ending on March 22nd. Government bond exposure decreased by US$166mn, while equity outflow was US$97mn. Year-to-date inflows to bond market declined to US$1.7bn from US$1.8bn a week ago, whereas equity inflows were US$412mn vs. US$508mn inflow recorded in the previous week.”

Of course, the Central Bank’s actions on Tuesday were not all about fending against a sudden stop. There was also a liquidity side to all this, one which I summarized in my previous post, but if you did not find that clear-cut, here’s a note from J.P. Morgan on the Bank’s meeting with economists on Wednesday. Note that primary dealers borrowed TRY 6.25bn at the overnight lending rate today (Friday). This was mainly because of tax payments at the end of the month, but it also underlines the  tight liquidity conditions.

Finally there’s a third interpretations of the cut in the overnight lending rate. By cutting some rates, the Bank looks cute to the government in the sense that it looks as if the Bank is supporting growth, or at least not hindering it… But looks should not be deceiving: The Bank was very clear at the meetings with economists that it was tightening, so I hope Economy Minister Zafer Caglayan, who has been critical of the Bank of late, wasn’t watching: It even told economists what they should check to see if they are tightening or not: Overnight repo rates, maturity of Central Bank funding and open market operations / liquidity need. You can see this latest indicator in action in slide 30 of the Bank’s presentation at its meeting with economists. By the way, if a central bank has to explain the most basic question of monetary policy, whether it is tightening or loosening, and to trained economists for all people, then Houston we have a problem…

So which explanation is right? Probably all three:) We even have an explanation for this in Turkish: The Bank is trying to kill several birds with one stone… I know I know; we Turks are not really an animal-loving, environmentalists bunch:)…

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