Turkey Central Bank to Consider Shift to Single-Rate Policy

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Turkey’s central bank is weighing a move to a simplified single-rate policy to boost confidence and attract more investment to the Middle East’s largest economy.

The central bank may publish a technical report sometime after its August rates decision outlining the scope and time-line for implementing the change, Governor Erdem Basci said at a press conference in Ankara Thursday. The immediate impact on monetary policy will be neutral, he said.

Investors have criticized the complexity of Turkey’s interest rates corridor, introduced five years ago with three separate interest rates to give the bank greater flexibility to respond to economic uncertainty. Declining volatility in the U.S. bond market allows policy makers to set a single short-term benchmark interest rate instead of the current daily adjustments, Basci said.

“This is not an effort to loosen or tighten our policy stance,” Basci told reporters. “I see this as a step to increase confidence. I believe it will result in increased demand and investment by foreign investors,” he said.

The lira briefly pared losses following Basci’s remarks, before retreating again to trade 0.5 percent lower at 2.7798 per dollar at 3:31 p.m. in Ankara.

Basci’s remarks were “lira positive since they signal a return to orthodox policies,” Isik Okte, a strategist at TEB Invest in Istanbul, said in an e-mail.

The current rates framework, adopted in 2010 in the wake of the global financial crisis, uses three separate interest rates ranging from 7.25 percent to 10.75 percent. The bank will use technical studies to determine the single rate needed to maintain the current policy stance, Basci said.

Watching the Fed

The proposed change may take effect before a likely rate increase by the Federal Reserve which may come in September, Basci said. The Fed is seeking to gradually normalize monetary policy after keeping rates near zero for five years.

Turkey has “no need to fear” a U.S. rate increase, he said.

High volatility in U.S. 10-year yields destabilized Turkish government debt with similar maturity since the Fed first hinted that it would begin to curb monthly bond purchases, Basci said. Recent Fed comments have reduced volatility both in the U.S. and emerging markets, paving the way for the Turkish bank’s proposed change, he said.

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