CBT Unorthodoxy Reaches For Final Point

The Central Bank of Turkey held its monthly rate setting meeting yesterday and remained all interest rates unchanged as expected but made some technical adjustments such as canceling the monthly repo auctions.

The policy rate remained unchanged at 4,50%, while o/n rate at 7,75%, and o/n rate for primary dealer banks within OMOs was kept stable at 6.75%. According to official report released, CBT has a concern about inflation and may do furthermore tightening actions (see our Turkey Inflation article here).

Due to ultimate liquidity injections by the central banks of developed economies, the CBT has been running an unorthodoxy policy with a never-before-tried tool named as interest rate corridor. With interest rate corridor, the CBT has the opportunity to change the actual interest rate in the range between lower and higher bands of interest rate corridor depending upon its targets and global conditions. Now it seems that the CBT’s efforts are to simplify this policy. The new adjustments are fixing the actual borrowing rate at 6,5% which is likely to generally accepted as the new policy rate by the market. By this, one can assert that the policy rate at 4,5% has no meaning. More interestingly, this assertion is even also validated by the CBT. What the CBT actually doing is raising the interest rates practically but not theoretically. Shortly, what happened yesterday was an interest rate hike of around 50 bps (as well as we say Turkish Lira gained value against the US Dollar in the money market).

Today, we saw the CBT decreasing the total amount in weekly repo auction by TRY2bn. This means the CBT limiting the amount of the cheaper liquidity.

Simply, the CBT is running the strangest monetary policy in history but luckily it is trying to gain some understandability now. With the recent trend line on both inflation and FX rates, we will see much more normalization, just because the CBT has no room for avant-garde policy implications.

Finally, I remain 100% confident that CBT most lately will hike the rates at the mid of 2014.