Central Bank leaves back door open
“Turkey’s monetary policy framework is notoriously complicated,” said Jason Tuvey, an analyst at Capital Economics, a London-based independent research consultancy.
The Central Bank of Turkey has three rates at its disposal to provide liquidity to banks: the overnight lending rate, the one-week repo rate and the late liquidity window rate, he explained. “The importance of each of these has varied over time. Since early 2017, only the late liquidity rate has been used and thus that has been the main determinant of local monetary conditions.”
For example, the key policy rate is meant to be the one-week repo rate, which is set at 8%. But it was the late liquidity window rate that was hiked to 16.5% in an emergency meeting last week in a bid to support the sliding currency.
This week it was announced that, to simplify matters, in June the one-week repo rate will be adjusted to the late liquidity window rate of 16.5%, which will be the single rate used to set policy.
But Tuvey says there may be more to the matter than meets the eye. In an investor’s note this week, Capital Economics said the decision would appear to be less like an effort to simplify its monetary policy framework than “a way to create room to raise market interest rates if necessary without incurring the wrath of President [Recep Tayyip] Erdogan”.
The Central Bank committed to using a single policy interest rate in 2014 but, by the end of 2016, it was once again using multiple facilities to provide liquidity to banks.
This time, again, the Central Bank still has the same number of interest rates at its disposal. It has also failed to confirm whether it will provide all of the banking sector’s liquidity needs by using the oneweek repo facility.
“As things stand, it has left open the possibility of providing additional funding to banks at the overnight lending rate [which is now set at 18%] and possibly the late liquidity rate,” Capital Economics said.
“In other words, the Central Bank of the Republic of Turkey has left itself with wiggle room to tighten monetary conditions without making an explicit change to the oneweek repo rate.”