Markets cheer Turkish Central Bank’s decisions: Experts

Interest rate hike of 475 basis points, providing funding through main policy rate to attract foreign investors, experts say

Tuba Şahin,Yunus Girgin   | 20.11.2020
Markets cheer Turkish Central Bank’s decisions: Experts


The Turkish Central Bank's interest rates hike and steps to simplify the operational framework of the monetary policy are seen as an important move to increase predictability which will attract foreign investors to the country. 

In line with market expectations, the bank raised its one-week repo rate -- also known as its policy rate -- by 475 basis points to 15%.

It also decided to provide all funding through this rate, which it identified as its main policy rate.

Speaking to Anadolu Agency, Ferhat Yukselturk, the managing partner of Istanbul-based eCons Consulting, said the financial markets respond positively to the decision as the Turkish lira rallied against other major currencies and Turkish stocks gained ground.

Yukselturk underlined that the statement was clear, understandable, simple with a focus on targeting inflation.

"It was a significant decision in terms of predictability," he said, adding that the volatility on Turkish liras is expected to decline.

"The CBRT's [Central Bank of the Republic of Turkey] transition to a predictable policy stance again, and acting within the framework of market realities will attract foreign investors," he stressed.

Pointing that the Central Bank is not likely to build up its foreign exchange reserves, Yukselturk said the bank will wait for the Turkish lira to stabilize first.

"If the bank keeps its current tight stance and sees a rapid rise in foreign portfolio inflow, it may increase reserves to prevent rapid appreciation in Lira.

Main policy tool

Enver Erkan, an economist at Istanbul-based private investment firm Tera Yatirim, said in a client noted that the move was welcomed by financial markets as it was in line with the expectations.

“In addition to raising the policy rate, a simplification was also realized, establishing the ‘one-week repo rate’ as the main policy tool,” he said.

Erkan also underlined the bank strengthened its real interest position and increased predictability by directing all funding to a single rate.

Underlining that in line with the orthodox monetary policy of not activating the late liquidity window (LLW), Erkan said this environment will positively affect the perception in terms of transparency, predictability, and communication.

Pointing to the recent positive moves such as stretching the derivative transaction limits and decreasing the withholding tax rate from deposits, he added: “The market expects that such moves will continue with normalization steps such as removing the asset ratio and reserve requirement remuneration conditions.”

Haluk Burumcekci, economist and financial analyst at Anadolu Agency, underlined that the bank kept the width of the interest corridor at 600 basis points while raising interest rates.

"However, the bank gave the message that the corridor flexibility will not be used at this stage, saying that all funding will be provided with weekly repo auctions," Borumcekci said.

Noting the real interest rate before-decision was at minus 1.5% and the expected real interest rate was minus 0.5%, the rates increased to 2.8% and 3.8%, respectively following the move, he said: "Increase of around 2-3 points above the average real interest rate, which is an important gauge for the expected inflation in Emerging Markets, will reduce the depreciation pressure on the Turkish lira."

"It prevents the bank's official reserves from melting down for the finance of the current account deficit."

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