Turkey Seen Moving to Single Rate as Basci Follows U.S. Fed

  • Survey shows Turkish central bank raising one-week repo rate
  • Analysts predict rate increase won't have impact on liquidity

Turkey’s central bank is expected to begin its shift toward a single benchmark interest rate on Tuesday, abandoning the complex monetary policy it introduced after the global financial crisis.

Policy makers will raise the one-week repurchase rate -- one of three benchmarks in the current system -- to 8 percent from 7.5 percent, according to the median estimate in a Bloomberg survey. Governor Erdem Basci will probably offset the increase by adjusting the amount of cash the bank lends at each rate, making it “neutral” from a monetary policy perspective, said Bora Tamer Yilmaz, head of macroeconomic research at Ziraat Yatirim in Istanbul.

“The one-week repo rate will eventually be the sole benchmark,” Yilmaz said on Monday. “What we don’t know is whether the bank will simplify policy in one step or over a longer period.”

Investors have criticized the complexity of Turkey’s interest rates corridor, introduced five years ago to give the bank greater flexibility amid the global recession. The lira has lost about 20 percent this year, as the collapse of a ceasefire with autonomy-seeking Kurdish militants, political uncertainty around two general elections and a broader emerging market sell-off weighed on the currency.

July Pledge

Basci said in October that it would be “reasonable” to expect a rate increase at the bank’s first meeting after the Fed lifts borrowing costs. It would also mark a step toward his July pledge to abandon a monetary policy system in which the central bank’s overnight lending and overnight borrowing rates are also considered benchmarks. If the one-week repurchase rate is to become the single key measure as analysts predict, it will need to rise -- the central bank’s average cost of funding was 8.85 percent on Friday.

Basci said moving to a single rate would increase demand and build investor confidence. What he never clarified was which one of the three rates would become the benchmark, and when the transition would end. He also said the move would not affect liquidity conditions.

Separate Bloomberg surveys show the bank is expected to leave the overnight lending rate unchanged at 10.75 percent and raise its overnight borrowing rate by a quarter of a percentage point to 7.5 percent.

“Ultimately, there should be no need to use a corridor and the weekly repo rate will likely be the main policy tool,” Morgan Stanley’s Istanbul-based economist Ercan Erguzel said in an e-mailed report on Monday.

Daily Funding

The central bank provides funds to lenders daily using both the one-week repurchase rate and the overnight lending rate. By reducing the proportion that banks borrow under the more expensive lending rate, policy makers can ensure the average cost incurred by banks is unaffected by an increase to the repo measure.

Sakir Turan, an economist at Odea Bank AS in Istanbul, predicts the central bank will also lower the overnight lending rate to compliment the repurchase rate increase, so that the amount of funds it releases under both rates can remain the same. Raising the repurchase rate on its own would create unnecessary confusion, Turan said by phone on Monday.

“The cut is also necessary to prevent possible tightening as a result of the one-week repo rate hike,”‘ he said.

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