ISTANBUL: Turkey’s central bank signalled a return to a more conventional monetary policy yesterday, telling economists it would focus on fighting inflation, albeit through what effectively amounts to covert interest rate hikes.
In one of the world’s most complex policy mixes, the bank has been battling to support a weak lira with forex auctions, liquidity adjustments and verbal intervention while avoiding the outright rate hikes it fears could cool growth.
Prime Minister Recep Tayyip Erdogan, whose government has built its reputation on a decade of rising prosperity, is keen to avoid any slowdown ahead of an election cycle starting next year and has been a vocal champion of low rates.
With a sliding currency and rising inflation, that has left the central bank caught between a rock and a hard place. In a closed-door meeting with economists a day after it again left its main rates on hold, the bank said the lira’s weakness meant inflation would stay above target for some time and that price stability would now be its main focus.
“This meeting marks an end to the central bank’s unorthodox policy experiment, or that is what the central bank is telling us,” said Timothy Ash, head of emerging markets research at Standard Bank, who attended the meeting.
The bank held fire on interest rates on Tuesday but signalled more tightening of day-to-day monetary policy, as it worries about a withdrawal of US monetary stimulus that could weaken the lira and push inflation up further.
It decided to stop funding the market through weekly one-month repo auctions, a move that gives it tighter control over overnight lending rates and will enable it to increase banks’ cost of funding more sharply if needed.
In a presentation on its website, the bank said the end of one-month repos would bring its cumulative tightening in money market rates to around 350 basis points (bps) since May, compared to a 60 bps rise in 1-year inflation expectations.
Economists said that amounted to raising interest rates by the back door.
“For 99.9 percent of the people who read yesterday’s monetary policy committee statements, the central bank kept rates on hold,” said Fatih Keresteci, an Istanbul-based strategist at HSBC.
“But for the rest, for the financial decision makers, the decision was an interest rate hike,” he said.
Emerging market currencies including the lira have gained ground in recent weeks on expectations the US Federal Reserve will wait until March before trimming bond-buying that has flooded the developed world with cheap dollars.
That has bought Turkey’s central bank some time, but the lira remains near historic lows against the dollar as the country’s huge current account deficit leaves it vulnerable to eventual reining in of policy by the Fed.
Investors were baffled two months ago when Central Bank Governor Erdem Basci ruled out rate hikes to support the lira, the most obvious tool to defend it, but predicted the currency would recover to around 1.92 against the dollar by year-end.
It was trading at around 2.004 to the dollar yesterday, compared to its record low of 2.0840 in September. Reuters
