Turkey Won’t Rush to Act Over Volatility, Central Bank Says

Updated on
  • Governor says bank not pursuing ‘high-frequency’ policy
  • Bank inclined to wait to see if shocks are temporary

Turkish Lira's Collapse Weighs on Central Bank

Turkey’s central bank said it’s likely to wait to see whether the impact from recent financial volatility on the economy proves to be temporary before taking policy action, signalling that policy makers won’t rush to raise interest rates to stem a currency decline.

“While forming our monetary policy stance, we will be carefully assessing how lasting or temporary the shocks are and their impact on main trends,” Governor Murat Cetinkaya said on Tuesday at a press conference in Ankara. “We are not conducting high-frequency monetary policy anymore.”

The central bank unexpectedly raised borrowing costs last month, a decision that failed to stem a rapid depreciation of the lira, amid investor concern that policy makers will hesitate to deliver more increases to counter the impact of higher U.S. interest rates. At the same time, the central bank is also under pressure from President Recep Tayyip Erdogan to cut borrowing costs.

For more on last month’s rates decision, read: Turkey Central Bank Unexpectedly Raises Rates on Lira Plunge

Cetinkaya’s comments “suggest that the bar for interest-rate increases remains high and that an emergency rate hike does not seem to be on cards,” Petr Krpata, a rates strategist at ING in London, said by e-mail after the governor’s speech. “This makes the lira definitely more vulnerable as the central bank seems unwilling to step on the brakes and lean against the lira decline.”

The bank’s simplification of monetary policy -- intended to narrow the corridor between the three main interest rates and largely achieved through rate cuts that began in March -- has mostly delivered the intended benefits, Cetinkaya said. When simplification is completed, the main funding tool will be the one-week repo, which currently stands at 8 percent, according to the annual policy document posted on the bank’s website after the governor’s speech.

The bank can adjust the cost of cash it provides to commercial lenders on a daily basis by blending funding from different tools at different interest rates.

The lira was trading 0.4 percent higher at 3.5120 per dollar at 1:03 p.m. in Istanbul, set for its first gain in four days as most emerging-market currencies climbed against the dollar. The lira has weakened more than 10 percent over the past month.

— With assistance by Constantine Courcoulas

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