The Kapali Carsi

‘Should’ Turkish monetary policy

In my latest Hurriyet Daily News (HDN) column, I discuss what the Central Bank of Turkey should do at Thursday’s rate-setting meeting- versus what it will actually do. You can read the whole thing at the HDN website, and I have a few additional points to make.

First of all, I was planning to write quite a bit in the column on how the Central Bank would manage to keep the yield curve flat, but my friend Ozlem Derici, chief economist at DenizInvest, warned me that Governor Erdem Basci had actually “redefined” the yield curve as the difference between benchmark bond and policy rates. Checking Basci’s latest presentations confirmed her. But some Turkey economists still take Basci at her (initial) word. Here’s Erste chief economist Nilufer Sezgin speculating on how the Central Bank could try to keep the yield curve flat:

What about the ‘flatness’ criteria or the yield curve? The CBT may hope to drive the long-term yields lower with its rate cut – which we believe would prove untrue unless the global factors help. As another option, the CBT may rely on liquidity management to keep the blended cost of funding above the policy rate and close to the long-term yields. This could also prevent an invalidation of the ‘flatness’ criteria. Not to mention that the CBT may also argue that the yield curve is still flat, or even inverted, once the term premium on long-term yields is taken into account. Obviously, none of these strategies would contribute to the CBT’s credibility.

It seems I am not the only one who doesn’t trust the the Central Bank!:) Anyway, moving on, let me get a little bit wonkish and tell you about market expectations: 3-month forward swaps are pricing a rate cut slightly over 1 percentage point over the course of three months, whereas bond markets’ expectations over the next two months are a fall in the policy rate of a little bit less than 1 percentage point. That’s why I wrote in the column that markets were pricing in a one percentage cut over the course of the next three months.

I am assuming that the typical EconoMonitor reader is interested/invested in markets more than my typical HDN readers, and so let me delve into the market impact of the decision: A 50-75 basis points (I never write things in bp terms in my HDN columns, but I already told you about my assumption) should not move markets, as it is completely expected. In any case, Turkish bond yields do not have much room down for  to go. See how unresponsive they have become to monetary policy, which I am proxying by the Bank’s average funding rate, as it is more relevant than the policy rate:

To make this important point clear, let me just show you the aftermath of the Central Bank’s emergency hike at the end of January:

Why is this the case? With Turkey’s risk and inflation outlook, the current level of bonds is not attractive at all. Let me quote from Citi Turkey economists fresh-out-of-the-oven trip notes from meeting with investors in London:

A few investors compared India, where the RBI cares about inflation and the 10-year bond yield is around 8.7%, with Turkey, where the CBT is perceived to be less concerned about inflation and the 10-year bond yield is around 9%.

Elementary, my dear Watson…

Finally, loyal readers would know that I usually refer to business channel CNBC-e’s expectations surveys. But theirs wasn’t available on Friday, and so I had to use Anatolia Agency’s. It came out this morning, and the results are almost exactly the same as CNBC-e’s- which should not be a surprise: After all, they more or less ask the same economists/analysts:)…

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