Released July 26, 2013 | ANKARA
en
Researched by Industrial Info Resources (Sugar Land, Texas)--The Central Bank of Turkey (CBT) (Ankara, Turkey) raised its overnight lending rate by 75 basis points to 7.25% in order to tighten monetary conditions and stabilise the lira. In line with expectations, the CBT kept its policy rate and borrowing rate unchanged at 4.5% and 3.5%, respectively. The bank's management also said that "additional monetary tightening will be implemented when necessary." The rate increase, which came for the first time in two years, was within the 50 to 100 basis points that were anticipated by most analysts.
According to an announcement from the bank's Monetary Policy Committee (MPC), the deterioration in inflation expectations and the need to promote financial stability in the face of rapid credit growth and subsiding capital inflows were highlighted as the key drivers of widening its "interest rate corridor," which allows policy makers to vary borrowing costs daily. The CBT emphasized that its cautious stance will be maintained until the inflation outlook is in line with the 5% medium-term target.
"Although the decision will stabilize the markets in the short term, we think that the CBT will sooner or later get tested, given Turkey's external vulnerabilities and the rise in inflationary pressures," said Yarkin Cebeci, a senior economist at JP Morgan Chase based in Istanbul. "Thus, we see potential for further monetary tightening. In effect, we see another 125-basis-point (bp) hike in the upper band and a 100-bp in hike in the policy rate in the coming months."
In recent weeks, the central banks of Indonesia, India and Brazil performed policy changes to regain investor confidence and calm the markets, after U.S. Federal Reserve Chairman Ben Bernanke signalled that there would be a tapering in quantitative easing policy later this year.
With a large current account deficit, the Turkish economy is largely dependent on foreign money. As the money inflow continues, the Turkish lira will strengthen against the foreign currencies, such as the dollar and the euro. The Central Bank has been forced to spend $7 billion with currency-selling auctions to decrease the volatility and stabilize the currency.
"Due to on-going uncertainties regarding the global economy and the volatility in capital flows, the Committee has decided to increase the flexibility of the liquidity management," the MPC said in the statement. "To this end, developments regarding price stability and financial stability will be closely monitored and necessary adjustments will be made in the composition of Turkish lira liquidity provided by the Central Bank."
"The decision to increase the 'flexibility of the liquidity management' implies that the CBT is willing to allow for higher volatility in short-end rates in order to have more stability in Turkish lira, the switch to an interest rate defence of the currency," said Christian Keller, a senior economist at Barclays Capital based in London. Last week, the lira fell more than 7% to 1.9737, an all-time low against the dollar.
Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, and eight offices outside of North America, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.
According to an announcement from the bank's Monetary Policy Committee (MPC), the deterioration in inflation expectations and the need to promote financial stability in the face of rapid credit growth and subsiding capital inflows were highlighted as the key drivers of widening its "interest rate corridor," which allows policy makers to vary borrowing costs daily. The CBT emphasized that its cautious stance will be maintained until the inflation outlook is in line with the 5% medium-term target.
"Although the decision will stabilize the markets in the short term, we think that the CBT will sooner or later get tested, given Turkey's external vulnerabilities and the rise in inflationary pressures," said Yarkin Cebeci, a senior economist at JP Morgan Chase based in Istanbul. "Thus, we see potential for further monetary tightening. In effect, we see another 125-basis-point (bp) hike in the upper band and a 100-bp in hike in the policy rate in the coming months."
In recent weeks, the central banks of Indonesia, India and Brazil performed policy changes to regain investor confidence and calm the markets, after U.S. Federal Reserve Chairman Ben Bernanke signalled that there would be a tapering in quantitative easing policy later this year.
With a large current account deficit, the Turkish economy is largely dependent on foreign money. As the money inflow continues, the Turkish lira will strengthen against the foreign currencies, such as the dollar and the euro. The Central Bank has been forced to spend $7 billion with currency-selling auctions to decrease the volatility and stabilize the currency.
"Due to on-going uncertainties regarding the global economy and the volatility in capital flows, the Committee has decided to increase the flexibility of the liquidity management," the MPC said in the statement. "To this end, developments regarding price stability and financial stability will be closely monitored and necessary adjustments will be made in the composition of Turkish lira liquidity provided by the Central Bank."
"The decision to increase the 'flexibility of the liquidity management' implies that the CBT is willing to allow for higher volatility in short-end rates in order to have more stability in Turkish lira, the switch to an interest rate defence of the currency," said Christian Keller, a senior economist at Barclays Capital based in London. Last week, the lira fell more than 7% to 1.9737, an all-time low against the dollar.
Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, and eight offices outside of North America, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.
