Financial Times

Rates move by Turkey’s central bank fuels independence fears

by Mehul Srivastava  & Roger Blitz, Financial Times

January 25, 2017 | 6:38 pm
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Turkey’s central bank left its main interest rate unchanged yesterday but raised the overnight lending rate in a move that sent the lira tumbling by more than 1 per cent against the dollar.

Economists had expected monetary authorities to raise the benchmark repurchase rate in a bid to boost the lira, which has been one of the world’s worst-performing currencies this year. But the monetary policy committee kept the rate unchanged at 8 per cent, while increasing the overnight lending rate 75 basis points to 9.25 per cent.

The committee also raised its late liquidity window lending rate, which is increasingly used by banks that are not receiving adequate funding at the cheaper repo rate earlier in the day, by 100 basis points to 11 per cent.

The surprise decision to keep the benchmark repo rate on hold is likely to add to concerns about the bank’s independence. President Recep Tayyip Erdogan has often blamed high rates for choking growth.

The economy endured its first contraction in seven years when it shrank 1.8 per cent in the third quarter of 2016 as the country felt the impact of last year’s failed coup, a government crackdown and terrorist attacks.

But last week, after the lira plunged 4 per cent in a single day, hitting a new low, Mr Erdogan signalled he was prepared to accept central bank action to bolster the lira. The currency then rebounded, in anticipation of a rate rise.

But yesterday it fell 1.25 per cent to 3.80 against the dollar, before recovering slightly as markets absorbed the bank’s complex decisions.

Piotr Matys, a strategist at Rabobank, said the central bank had sent a hawkish message by raising both the overnight lending rate and the late liquidity window rate. “That said, the meeting was not about officially confirming the backdoor tightening, but about exceeding market expectations and delivering a large-scale hike, which in our view the central bank failed to do,” Mr Matys said. “Therefore, we remain of the view that the central bank may have to raise rates substantially in coming weeks, should the selling pressure on the lira resume.”

The increase to the late liquidity window rate continues an unorthodox policy of tightening liquidity – described as a “backdoor channel” by deputy prime minister Mehmet Simsek – that had helped strengthen the lira. In effect, by limiting the availability at lower interest rates, it forces commercial lenders to resort to the late liquidity window, making the effective interest rate closer to 11 per cent than the benchmark 8 per cent.

The bank signalled it might raise rates further if currency fluctuations continued to have an impact on inflation.

“Excessive fluctuations in exchange rates since the previous meeting have increased the upside risks regarding the inflation outlook,” Murat Cetinkaya, the central bank governor, said. “With the supportive measures and incentives provided recently, the recovery in the economic activity is expected to continue at a moderate pace.”

The bank has missed its inflation target of 5 per cent for six straight years. In December, inflation was at 8.5 per cent.


by Mehul Srivastava  & Roger Blitz, Financial Times

January 25, 2017 | 6:38 pm
  |     |     |   Start Conversation

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