The Pak Banker - - COMPANIES/BOSS -

Turk­ish cen­tral bank Gover­nor Er­dem Basci is fi­nally lay­ing to rest his pol­icy of three in­ter­est rates, long af­ter two of them ceased to hold any mean­ing to in­vestors.

The bank may switch to a sin­gle bench­mark this year, aban­don­ing its pol­icy of switch­ing be­tween tar­gets. The lira inched higher af­ter the an­nounce­ment by Basci on Thurs­day - - and then fell within min­utes as in­vestors' at­ten­tion re­turned to the wors­en­ing se­cu­rity sit­u­a­tion and the Fed­eral Re­serve.

While his in­ter­est-rate cor­ri­dor -flip­ping be­tween a higher overnight and a lower weekly cost -- helped smooth out lira gy­ra­tions by ward­ing off spec­u­la­tors in the pol­icy's early days in 2012, it's had lit­tle rel­e­vance of late. That's be­cause even the higher rate isn't enough for in­vestors wary of Tur­key's po­lit­i­cal risk at a time when the Fed is about to lift rates.

"For­eign in­vestors can cal­cu­late weighted av­er­age mar­ket in­ter­est rates, but what they want to see is a sta­ble, pos­i­tive real in­ter­est rate lead­ing into Fed tight­en­ing -- sim­ple," Tatha Ghose, a Lon­don-based economist at Com­merzbank AG, said by email Thurs­day. "When the cen­tral bank hikes this new bench­mark by 150 ba­sis points, as we forecast, then the lira will sta­bi­lize -- not be­cause the pol­icy def­i­ni­tion changes."

In­vestors have be­come ever more cau­tious as po­lit­i­cal par­ties have yet to form a coali­tion gov­ern­ment af­ter last month's in­con­clu­sive elec­tions even as the na­tion gets sucked into mil­i­tary con­flicts in Syria and Iraq. Ten­sions have es­ca­lated since a sui­cide bomb blamed on Is­lamic State killed more than 30 peo­ple in a bor­der town July 20.

The lira, which has tum­bled 16 per­cent against the dol­lar this year, the third worst de­pre­ci­a­tion among ma­jor cur­ren­cies, was poised for a record­low close on Thurs­day af­ter the death of three Turk­ish sol­diers in the na­tion's south­east ex­ac­er­bated con­cern over the coun­try's peace process with Kur­dish rebels.

The gov­ern­ment's bor­row­ing costs have jumped the most in emerg­ing mar­kets this year, with 10-year bond yields climb­ing 1.6 per­cent­age points to 9.62 per­cent. For­eign in­vestors sold a net $828.9 mil­lion of Turk­ish stocks and bonds in the week to July 24, the most in more than a month.

The cen­tral bank will seek to "find out what is the sin­gle, short-term in­ter­est rate that would al­low us to main­tain the same mon­e­tary pol­icy stance we have now," Basci said in his state­ment. The cur­rent frame­work, which uses three sep­a­rate in­ter­est rates rang­ing from 7.25 per­cent to 10.75 per­cent, was in­tro­duced to al­low the cen­tral bank greater flex­i­bil­ity to re­spond to eco­nomic un­cer­tainty, Basci said.

While the cen­tral bank has left its weekly rate, also known as the pol­icy rate, un­changed since Fe­bru­ary, it's pushed up the av­er­age cost of fund­ing for banks by chang­ing the amount of credit it of­fers through repo oper­a­tions. Banks' weighted av­er­age bor­row­ing costs climbed to 8.60 per­cent yesterday, more than a per­cent­age point above the pol­icy rate.

Sim­pli­fy­ing the regime will pro­vide in­vestors with more clar­ity and trans­parency, Phoenix Kalen, an emerg­ing-mar­ket strate­gist at So­ci­ete Gen­erale SA in Lon­don, said by e-mail on Thurs­day. But that still "may not be enough to over­ride the more press­ing and per­sis­tent neg­a­tive dy­nam­ics re­gard­ing pre­ma­ture elec­tions, es­ca­la­tion of re­gional geopol­i­tics and Fedin­duced cap­i­tal out­flows," she said.

The lira's weak­ness and ac­cel­er­at­ing in­fla­tion has brought the bank's eas­ing cy­cle to an end af­ter cut­ting the main one-week re­pur­chase rate by a to­tal of 75 ba­sis points dur­ing the first two months of this year. Prices rose 7.2 per­cent in June from a year ear­lier, com­pared with bank's year-end tar­get of 5 per­cent.

"The main prob­lem with Tur­key's mon­e­tary pol­icy post-2008 was not unortho­doxy," Er­can Er­guzel, Mor­gan Stan­ley's Is­tan­bul-based economist, wrote in an e-mailed re­port Thurs­day. "It was low real pol­icy rates. In other words, set­ting the level of a new sin­gle pol­icy rate will be much more im­por­tant than a sim­pli­fied pol­icy rate."

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