Economists Confounded as Basci Rates Go Symmetric: Turkey Credit

Economists are split on whether Turkish monetary policy is looser or tighter after central bank Governor Erdem Basci cut one of his three interest rates while saying he’d use an experimental tool to manage liquidity.

BNP Paribas SA, Goldman Sachs Group Inc., Oyak Securities and Ata Invest interpreted the move as loosening policy to focus on boosting growth, while BGC Securities said it was contractionary. Morgan Stanley described it as “neither here nor there” and Finansbank called it “confusing.” The lira at first weakened before rallying, while two-year note yields rose and the 10-year rate fell.

Basci, who uses three interest rates along with frequent adjustments to reserve requirements to control lending and the exchange rate, said the changes would make his so-called rates corridor “more symmetric.” The approach has prevented traders from taking a view on the lira and helped reduce its volatility to a record low since its introduction in October 2011.

“Not surprisingly, the central bank surprised the markets once again,” JPMorgan Chase & Co. economist Yarkin Cebeci said in an e-mailed report from Istanbul after yesterday’s decision. “We do not think that the bank has become more or less hawkish. Instead, the series of decisions they have taken today signals that the unorthodox policy mix could be taking a new turn.”

‘More Symmetric’

The Monetary Policy Committee in Ankara cut the upper end of its corridor, the overnight lending rate, to 7.5 percent from 8.5 percent while leaving the lower end, the overnight borrowing rate, unchanged at 4.5 percent. It also left the benchmark one-week repurchase rate unchanged at 5.5 percent. None of the economists in a Bloomberg survey before the rates decision yesterday correctly predicted the changes.

While the central bank didn’t raise reserve requirements, it did make it more expensive to hold foreign exchange or gold by increasing a so-called reserve option coefficient.

The committee said in a statement it will “increase the effectiveness” of its reserve-options mechanism, reducing the need for a wide band. “The interest-rates corridor was made more symmetric by cutting the overnight borrowing rate,” it said, without elaborating on the benefits of symmetry.

Neutral Policy

“The central bank’s expansionary policies are gradually being pulled back to a more neutral policy,” Ozgur Altug, chief economist at BGC Partners in Istanbul, said in an interview yesterday. “They’re concerned about a new wave of bad news from Europe, but at the same time they’re concerned about loan growth and an increase in the current-account deficit, so this is just fine tuning.”

The central bank said in a statement on its website today that the tighter liquidity policy, together with the recent deceleration in capital inflows, should have a dampening effect on credit growth. The current-account deficit will probably increase in the short-term, and the existing monetary policy framework will help to limit further deterioration, it said.

Making the corridor more symmetric is a reference to balancing the difference between the benchmark interest rate and the overnight rates, according to Altug. After the changes, the benchmark one-week repo rate is 200 basis points below the upper end of the corridor, down from 300 basis points before, and remains 100 basis points above the lower end.

“The bank aims to bring the policy rate close to the midpoint of the corridor, which will move the monetary policy stance from expansionary towards contractionary,” he said.

Untested, Unique

The reserve option mechanism is the multiplier at which banks are allowed to keep required reserves for lira liabilities in either foreign exchange or gold at the central bank. Moody’s Investors Service senior credit analyst Sarah Carlson called the mechanism “untested” and “unique” in a conference on Turkey in Istanbul on Nov. 21.

Keeping reserve requirements on hold, contrary to most economists’ forecasts, showed that policy makers were relaxing their stance on loan growth, Selim Cakir, chief economist at Turk Ekonomi Bankasi AS, the Turkish unit of BNP Paribas in Istanbul, said in a report yesterday.

The bank has been adjusting interest rates to control capital flows and the value of the lira, while using reserves to fine-tune loan growth.

“The priorities of the central bank seem to have shifted from excessive inflows to worries about growth,” Cakir said. “Today’s decision signals a more dovish stance.”

Aggressive Easing

“The surprise cut to the top band of the corridor was intended mainly to stimulate the supply side of the economy, in view of the sensitivity of small- and medium-sized businesses and corporate lending to the top end of the interest rate corridor,” Goldman Sachs economist Ahmet Akarli said in a report from London yesterday. “This implies quite an aggressive easing in overall lending conditions” and risks a “more rapid widening in the current-account deficit,” he said.

Turkish loans grew 19.9 percent in the 12 months to March 15, according to banking regulator data released this week, above the central bank’s year-end target of 15 percent. A revival of concern that Europe’s debt crisis will worsen may have prompted the bank to take a less hawkish stance on credit growth, according to Gulay Girgin, chief economist at Istanbul-based Ata Securities.

“The surprise cut in the upper band of the corridor also emanates from the recent rise in global uncertainties,” Girgin said by e-mail yesterday. “The bank, rather than being disturbed by the pace of commercial and corporate loan growth, preferred to take a precautionary step to preserve loan growth,” and protect the economy from a deteriorating sentiment in global markets, she said.

Capital Flows

International investors increased their holdings of Turkish debt by $16 billion last year, driving yields 483 basis points lower, the biggest decrease among 20 major emerging markets tracked by Bloomberg. The flow began to reverse this month, with foreign investors selling $1.6 billion in government debt in the week to March 15, the biggest weekly outflow since 2007.

The lira climbed 0.4 percent to 1.8149 per dollar at 8:23 p.m. in Istanbul yesterday, after turning to a loss in the minutes following the rates decision. It lost 0.4 percent today to 1.8026. Yields on two-year benchmark bonds rose 9 basis points today to 6.40 percent, extending their increase this month to 71 basis points, the biggest among 20 major emerging markets tracked by Bloomberg.

The yield on 10-year bonds dropped six basis points to 7.18 percent yesterday, falling for a first day in three, while the rate on one-year sovereign debt spiked 32 basis points to 6.38 percent, the biggest jump since October 2011.

The extra yield investors demand to hold Turkey’s dollar-denominated sovereign bonds rather than U.S. Treasuries was unchanged at 221 basis points, 72 basis points below the average for 59 emerging market countries, according to JPMorgan’s EMBI Global Diversified index.

Uncertain Outlook

Five-year credit-default swaps on Turkey fell one basis point to 143, compared with 159 for Russia and 175 for South Africa, both of which are rated higher. The contracts, which drop as perceptions of creditworthiness improve, pay the buyer face value in exchange for the underlying securities or cash equivalent if a borrower fails to adhere to its debt agreements.

The changes yesterday may be an admission by the bank that its policy mix has been ineffective in controlling loan growth, according to Cebeci at JPMorgan. The bank will probably increasingly use active liquidity management instead of reserve requirement increases to restrict loan growth, he said.

“Today’s decision might be an intermediary step in transitioning to a different policy stance,” Inan Demir, chief economist at Finansbank AS, the Turkish bank owned by National Bank of Greece, said in a report yesterday. Overall, he said the the move was surprising and confusing, “which presumably reflects the uncertain capital-flow outlook.”

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