The Kapali Carsi

Turkish rate decision simplified

The Central Bank of Turkey kept its overnight lending rate, which it had renamed the marginal funding rate (MFR) in the 2014 Monetary Policy and Exchange Rate Strategy report it published at the end of December. But it also didn’t, and it did a horrible job communicating it!:( I will do their job and make it really simple. Let’s start by comparing today’s statement with last month’s:

First, the overnight lending rate is now officially referred to as the MFR, as I mentioned above. There are also small differences regarding the description of economic developments, but the main difference is towards the end. Whereas the previous statement stated that “interbank money market rates will materialize close to 7.75 percent and the weighted average cost of funding (AFR) will materialize at 6.75 percent or above in the forthcoming period”, today’s has in place “interbank money market interest rates will materialize at 9 percent during additional monetary tightening (AMT) days, instead of 7.75 percent (the marginal funding rate).” This confused some economists, leading them to think that the Central Bank would not lend from the MFR on AMTs, forcing banks to borrow from the late liquidity window. That would have been a big problem, not only because the late liquidity window is operational at the end of the day, but because it would mean the Central Bank would not be honoring its commitment to lend from the MFR in accordance with banks’ collateral.

Luckily, it is much more simple: The Bank will simply be bringing the MRF to 9 percent on AMTs, as Reuters quoted a Central Bank official a couple of hours after the rate decision. As a result, interbank rates, which should be taken as reference for monetary policy stance, as the Bank stated in December, will materialize around 9 percent, and the average funding rate (AFR) will probably rise to the 8-8.5 percent range . Of course, some uncertainty remains: We don’t know how many AMT days we’ll have- we could have a few, or the whole month could be one big AMT!:) As a trader friend noted, until we know this, “everyday is a rate-setting day in Turkey, basically”…

You may be wondering why the Bank chose such a convoluted strategy rather than just hike the MFR. If you asked him, Governor Basci would tell you that they wanted to have the flexibility and uncertainty in this volatile environment. They can also continue to have different interest rates for the FX (MFR) and loan/bond (AFR) markets, as Gedik’s Ibrahim Aksoy noted- although you could achieve that with a simple MFR hike as well.

Anyway, what Basci won’t tell you is the pressure on the Bank by the government not to hike rates, which I detailed in my previous post. That’s why a market economist friend stated that “the rate decision confirmed politically induced monetary policy.” If you want to be a little more sympathetic towards the Bank, you can stick to the comment made by a journalist friend, which I am expanding a bit: There are two ways to say you didn’t hike rates: First, you can say you didn’t change the policy rate, you just widened the corridor. This is what the Central Bank did for a long time. But if “they” don’t buy it, then you can say that you widened the corridor, but only on certain days:)…So as Radikal columnist Ugur Gurses noted, if Prime Minister Recep Tayyip Erdogan asks him whether they hiked rates, Basci can now say: “No sir, we didn’t touch rates, I swear. The markets are going up”:):):)

Speaking of the PM, when asked on the rate decision during his press conference in Brussels, Erdogan congratulated the Central Bank for having made the right decision. So he seems to have bought it, at least for now:):):) By the way, Erdogan was better than his usual self, as he also emphasized the Bank’s independence. Not that I am buying, but hey, at least he is saying it!:) But he also put the blame for the weak lira on the Fed rather than politics or monetary policy. Again, I am happy; at least, he didn’t embarrass himself (and us Turks) by mentioning the interest rate lobby🙂

Speaking of comments, how did economists respond to the decision? While most domestic economists were in a wait-and-see mood, especially given the uncertainties I mentioned above, non-residents (mostly the London crowd) were much more skeptical. Capital Economics said that the Bank was shooting itself in the foot. According to RBS, “the rate decision disastrous for Central Bank credibility, negative for lira”. It was “more smoke and mirrors” for Standard Bank’s Tim Ash.

As for me? I acknowledge that it could have been much worse, i.e. no rate hikes at all. But as I detailed in the previous post, I would not be 100% confident even with a regular 125bp hike to the MFR rather than this stealth one. Besides, without seeing how much AMTs we’ll have, I cannot comment on the effectiveness of the move. But I can tell you that markets did not like the rate decision: USDTRY jumped from 2.2360 to 2.6000 right after the rate decision. As of 17.00 GMT, it is at 2.2550…

One Response to “Turkish rate decision simplified”

chaircatJanuary 21st, 2014 at 7:26 pm

Hi emre.. I miss the comments section at HDN, so I suppose I'll have to ask here … Over the summer, if I recall, the bank raised the rate to a level below the low range recommendations, but with enough alternative funding days that even though the rate was raised, it sort of wasn't raised that much. that didn't play well, and even a pride of lions wouldn't have dropped the lira back to 1.92 by year's end, even without December 17th.

Doesn't this increase merely bring the rate to the high-range of this summer's recommendations in a deteriorated climate?