Basci Delays Policy Shift as Turkey Unexpectedly Holds Ratesby
Lira drops; economists had predicted bank would follow Fed
Central bank says shift to single rate may begin next month
Turkey’s central bank delayed a widely anticipated shift to a simplified monetary policy, keeping interest rates on hold and saying that it will wait to see if the calm following the U.S. Federal Reserve’s increase persists.
Governor Erdem Basci kept his one-week repurchase rate at 7.5 percent. The overnight lending and borrowing rates, which make up the upper and lower ends of Basci’s so-called interest rate corridor, were also held at 10.75 percent and 7.25 percent. Economists surveyed by Bloomberg had predicted that the bank would raise the one-week repo rate and the borrowing measure. The lira weakened after the decision.
Basci said in October that it would be “reasonable” to expect the simplification to begin with a rate increase at the bank’s first meeting after the Fed lifted borrowing costs. Tuesday’s statement showed the bank will wait for another month to make sure the reduced volatility after the Fed’s move isn’t a temporary phenomenon.
As it waits, the lira may post further losses until the central bank provides a “solid signal that it will act as boldly as it talks,” said Gokce Celik, an economist at Finsanbank in Istanbul, in an e-mailed note.
Other economists say the situation is more complicated. Because Turkey’s corridor involves multiple rates that can move in different directions, the central bank’s decisions can’t always be classified simply as hikes or cuts.
In the case of Basci’s current plan, which was postponed on Tuesday, some analysts such as Ibrahim Aksoy at HSBC Holdings Plc in Istanbul argue that it would be treated as an expansionary move by the markets and trigger further losses in the lira.
“The simplification that the bank has in mind since late July entails cutting the overnight lending rate while hiking the one-week repo measure,” Aksoy, who accurately predicted Tuesday’s decision, said afterward. “They couldn’t do it because the lira wasn’t strong enough. If they had done, the lira would depreciate past 3 per dollar.”
The currency dropped after the announcement and was trading 1 percent lower at 2.9450 per dollar at 3:42 p.m. in Istanbul.
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 more than 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.
In its statement, the central bank said that “the committee indicated that, should the decline in volatility observed after the start of the global policy normalization persist, monetary policy simplification steps would begin with the next meeting.” The monetary policy committee is set to meet next on Jan. 19.
The lira’s decline on Tuesday will probably reverse unless investor sentiment toward emerging markets deteriorates, according to Aksoy.
“We maintain our view that the central bank will wait for the lira to appreciate until next month to begin simplification by cutting the upper-end of the interest rate corridor,” he said.
Basci said in July that he expected the volatility in the U.S. bond market to subside after the Fed finally raises borrowing costs. That would allow Turkey to adopt an orthodox monetary policy with a single rate which would help build investor confidence in the nation’s economy, the governor said at the time. He said the simplification process would not affect liquidity conditions because the policy framework would enable the bank to keep the cost of borrowing incurred by commercial lenders unchanged even if some of the three benchmark rates are raised or lowered.
Since the central bank move will have a “negligible impact” on bank borrowing costs, Basci’s delay makes sense, according to Piotr Matys, a Rabobank emerging-market currencies strategist who also predicted the decision.
“The monetary policy bias has gradually started shifting in favor of easing,” Matys said. “The outlook for inflation is relatively positive due to the rout in oil prices, the Russian ban on Turkish food and far more stable lira so far in the fourth quarter. But the market is not prepared for such a shift just yet to accept it without causing a lira selloff.”