Central Bank’s focus to shift to liquidity in 2012

ISTANBUL - Reuters

Shoppers are seen at the registers of a store in Istanbul owned by a local retailer. Many economists believe 2012 will be divided into two periods. In the first half of they year, they expect high inflation. In the second half of 2012, however, they expect the Central Bank to implement a looser monetary policy. Company photo

Faced with possible slow growth in 2012, lingering high inflation and current account deficit problems, the Turkish Central Bank will focus on managing liquidity, which will grant it more predictability, analysts predict.

In a Dec. 22 announcement, the bank’s Monetary Policy Committee said that in line with market expectations it would keep short-term interest rates unchanged and would implement tight monetary policy for a while longer in keeping with medium-term inflation expectations, saying it would protect its monetary policy flexibility.

Deputy Prime Minister Ali Babacan had expressed similar sentiments on Nov. 17, according to Reuters.
“In such an uncertain and changing economic landscape, it is only natural that the Central Bank should be able to adapt its policies in a quick fashion,” said Babacan, reiterating that nobody should expect a fixed three-month or six-month monetary policy under such circumstances.

“We should not expect radical changes in the Central Bank’s 2012 monetary policy,” said an undisclosed high-level banking analyst, according to Reuters.

“A flexible monetary policy would continue, but the Central Bank would be more inclined to focus on liquidity, especially liquidity measures on the Turkish Lira side,” the analyst added.

Most economists, according to Reuters, believe that monetary policy in 2012 will be divided into two periods. In the first half of the year, they expect high inflation and a wide current account deficit to prompt the Central Bank to continue with a tight monetary policy.

In the second half of the year, however, they expect the Central Bank to implement a looser monetary policy.

In the first of 2012, these economists expect the upper band of the 12.5 percent interest rate corridor to remain the same, but drop to 10 percent in the second half of 2012, especially towards the end of the year.

The same high-level banking analyst mentioned above, however, does not support the view that the Central Bank is looking at 2012 as two separate periods.

“The Central Bank believes that the measures it has implemented have made the economy more balanced and expects this trend to continue in 2012, bringing inflation close to its 5 percent target by the end of next year,” he said.

Finansbank Chief Economist İnan Demir said the Central Bank’s December meeting was more about loan growth.

“Loan growth has been growing since the end of last year. In November it was on the Central Bank’s back burner and it seemed that the Central Bank gave more importance to the Turkish Lira. However, I can say that in December, loan growth was back on the agenda,” said Demir.