Lira firms as Central Bank says it will complete policy simplification

ANKARA

Turkey’s Central Bank has said it has decided to complete the “simplification process” regarding the operational framework of monetary policy.

For years the Bank has relied on a complex system of multiple rates, which economists said made monetary policy less predictable. It has been funding through its late liquidity window rate, which it raised by 3 percentage points to 16.5 percent last week to shore up a tumbling lira.

The one-week repo rate will again be the Central Bank’s policy rate and this rate will be equal to the current funding rate at 16.5 percent, the Bank said in a statement on May 28.

The overnight borrowing and lending rates will be determined at 150 basis points below and above the one-week repo rate, it added.

The overnight borrowing, one-week repurchase and overnight lending rates were at 7.25 percent, 8 percent and 9.25 percent respectively.

The new framework will take effect on June 1 and the whole process is expected to be completed by June 7, the Bank stated.

“We think conducting funding through a single rate, the weekly repo rate, has increased predictability and sends a powerful signal to the markets that the tight stance will continue,” said İş Investment economist Muammar Kömürcüoğlu.

After months of decline, the Turkish currency rapidly rebounded, becoming the best performing emerging currency on May 28.

Following the Bank’s release, the lira firmed to 4.55 against the dollar from a close of 4.7 on May 25. The yield on 10-year securities also fell 50 basis points to 14.1 percent, while the Borsa Istanbul 100 Index climbed 3 percent.

The move came after an emergency 300 basis point interest rate hike to prop up the embattled lira, which hit record low of 4.9290 last week. Alongside last week’s rate hike, the Central Bank has also taken a series of other measures to ease forex liquidity.

Central Bank Governor Murat Çetinkaya signaled this move in a meeting with investors and bankers on May 27, according to participants of a meeting.

Investors who met with Çetinkaya and Deputy Prime Minister Mehmet Şimşek said Çetinkaya indicated that the Bank could move towards more orthodox policy.

“[Çetinkaya] said it was anticipated that there would be a narrow interest rate corridor and the one-week repo rate will be used again as the main funding instrument,” said one banker who declined to be identified, as reported by Reuters on May 28.

The two are due to meet with foreign investors in London on May 28-29.

Bankers at the Istanbul meeting said Şimşek’s comments focused on the government’s plans, stressing fiscal discipline, tight monetary policy and the commitment to the market economy, similar to comments he made last week.