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| CBRT Governor Erdem Başçı |
The central bank's Monetary Policy Committee (PPK)
decided on Thursday to lower its policy interest rate (one-week repo rate) by
0.5 percentage points from 10 percent to 9.5 percent.
However, it did not change the upper and lower limits of the interest rate corridor. The funding rate has been kept at 12 percent and the borrowing rate at 8 percent. As the effective central bank rate has been the policy rate since the end of January, lowering this rate by 0.5 percentage points corresponds to a noticeable relaxing in the tightness of the monetary policy.
Most financial market forecasters were not expecting a decrease in the central bank's policy interest rate. Thus one might admit that the central bank had surprised the market, but not me. Two weeks ago I had argued in this column (“The appreciating lira and monetary policy,” May 12) that given the tendency of the lira to appreciate in real terms as a result of a decrease in the nominal exchange rate on one side and a high inflation rate on the other, the real exchange rate would reach a dangerous zone of overvaluation within a few months. Admittedly, such an evolution will not be compatible with the goal of “balanced growth” for which the contribution of net exports should be sizable.
I had claimed in my piece that the “central bank has no choice other than to loosen its tight monetary policy” and I would not be surprised if an interest rate reduction is decided this month. I was also expecting a widening in the interest corridor, particularly by decreasing the borrowing rate, but the PPK preferred not to use this option demonstrating that a widening of the interest corridor -- in other words increasing the uncertainty aiming to impede excessive short-term capital inflows -- is no longer part of the preferred instruments of its monetary policy. The PPK had announced during its extraordinary meeting in January where harsh interest rates increases were decided that the policy interest rate would be the main rate for funding banks rather than the changing daily rate. The central bank remained true to this promise.
This feature of the monetary policy may seem too technical and confusing for laypersons but it is an important item when we come to the motivation(s) of the unexpected interest rate decrease. A widening of the interest corridor coupled with a changing interest rate of funding means an increase in uncertainty for the carry trade (hot money). Thus it has to play a discouraging role when the Turkish economy faces excessive capital inflows pushing up the real exchange rate. The fact that the PPK did not widen the interest corridor by lowering the borrowing rate at 8 percent may indicate that the central bank does not fear excessive inflows risking an appreciation of the lira but rather it fears too-low growth because of weak domestic demand. In order to understand the main motivation behind the policy interest rate decision, we have to wait for the detailed statement from the PPK that will be published in five days. However, the brief communiqué published after the meeting already provides some insights about this motivation.
One can read in the communiqué that “with the recent decline in uncertainties and improvement in the risk premium indicators, market interest rates have fallen across all maturities. In this regard, the Committee decided on a measured decrease in the one week funding rate. … Loan growth continues at reasonable levels in response to the tight monetary policy stance and macroprudential measures. In line with these developments, recent data indicate to a modest course in private final domestic demand. Meanwhile, with the help of the recovery in foreign demand, the contribution of net exports to economic growth is expected to increase. The Committee expects that such a demand composition will support disinflation and will lead to a significant improvement in the current account deficit in 2014.”
It is worth noting that the real exchange rate issue is not mentioned in the communiqué. Nevertheless, the reference to the “improvement in the risk premium indicators” invokes a permissive ground for short-term capital inflows. Since the PPK thinks domestic demand evolves as desired and a recovery in foreign demand will boost exports, a balanced growth without jeopardizing the goal of disinflation is under way. Thus I think the central bank fears an appreciation of the lira more than too-low growth in this context. I agree.
However, it did not change the upper and lower limits of the interest rate corridor. The funding rate has been kept at 12 percent and the borrowing rate at 8 percent. As the effective central bank rate has been the policy rate since the end of January, lowering this rate by 0.5 percentage points corresponds to a noticeable relaxing in the tightness of the monetary policy.
Most financial market forecasters were not expecting a decrease in the central bank's policy interest rate. Thus one might admit that the central bank had surprised the market, but not me. Two weeks ago I had argued in this column (“The appreciating lira and monetary policy,” May 12) that given the tendency of the lira to appreciate in real terms as a result of a decrease in the nominal exchange rate on one side and a high inflation rate on the other, the real exchange rate would reach a dangerous zone of overvaluation within a few months. Admittedly, such an evolution will not be compatible with the goal of “balanced growth” for which the contribution of net exports should be sizable.
I had claimed in my piece that the “central bank has no choice other than to loosen its tight monetary policy” and I would not be surprised if an interest rate reduction is decided this month. I was also expecting a widening in the interest corridor, particularly by decreasing the borrowing rate, but the PPK preferred not to use this option demonstrating that a widening of the interest corridor -- in other words increasing the uncertainty aiming to impede excessive short-term capital inflows -- is no longer part of the preferred instruments of its monetary policy. The PPK had announced during its extraordinary meeting in January where harsh interest rates increases were decided that the policy interest rate would be the main rate for funding banks rather than the changing daily rate. The central bank remained true to this promise.
This feature of the monetary policy may seem too technical and confusing for laypersons but it is an important item when we come to the motivation(s) of the unexpected interest rate decrease. A widening of the interest corridor coupled with a changing interest rate of funding means an increase in uncertainty for the carry trade (hot money). Thus it has to play a discouraging role when the Turkish economy faces excessive capital inflows pushing up the real exchange rate. The fact that the PPK did not widen the interest corridor by lowering the borrowing rate at 8 percent may indicate that the central bank does not fear excessive inflows risking an appreciation of the lira but rather it fears too-low growth because of weak domestic demand. In order to understand the main motivation behind the policy interest rate decision, we have to wait for the detailed statement from the PPK that will be published in five days. However, the brief communiqué published after the meeting already provides some insights about this motivation.
One can read in the communiqué that “with the recent decline in uncertainties and improvement in the risk premium indicators, market interest rates have fallen across all maturities. In this regard, the Committee decided on a measured decrease in the one week funding rate. … Loan growth continues at reasonable levels in response to the tight monetary policy stance and macroprudential measures. In line with these developments, recent data indicate to a modest course in private final domestic demand. Meanwhile, with the help of the recovery in foreign demand, the contribution of net exports to economic growth is expected to increase. The Committee expects that such a demand composition will support disinflation and will lead to a significant improvement in the current account deficit in 2014.”
It is worth noting that the real exchange rate issue is not mentioned in the communiqué. Nevertheless, the reference to the “improvement in the risk premium indicators” invokes a permissive ground for short-term capital inflows. Since the PPK thinks domestic demand evolves as desired and a recovery in foreign demand will boost exports, a balanced growth without jeopardizing the goal of disinflation is under way. Thus I think the central bank fears an appreciation of the lira more than too-low growth in this context. I agree.
Merhaba,
YanıtlaSilBu makalenizde bazı anlayamadığım noktalar var. Yanlış anlamadıysam, dolar kurunun düşmesi kabaca ihracata zarar veriyor ancak enflasyonu engeliyor diye bilir miyiz? Hatta düşük büyümeye ve ihracatta zarara rağmen cari açık daha mı önemli oluyor? Bu denge tam olarak nerede kurulmak isteniyor? Aydınlatabilirseniz çok sevinirim.
iyi çalışmalar,