Central Bank wanted to buy time, but it is too late

The Central Bank on April 25 positively surprised the markets by lifting the late liquidity window rate by 75 basis points.

Some had argued that the markets would have been satisfied with a 50 basis points hike, but even a 75 basis points increase was not enough. The U.S. dollar/Turkish Lira rate eased to 4.04 immediately after the rate decision, but climbed to 4.09 later in the day.

Analysts said the Central Bank took a positive step but its efforts were overshadowed by the adverse conditions in the global markets. They argued that if the global markets had been calmer the exchange rates could have followed a more stable path, at least for a while. But that did not happen, they added.

Most of the bankers I spoke with ahead of the Central Bank’s rate-setting meeting had anticipated a rate hike of 50 basis points. We can say that this was a widely-shared view and that was why the exchange rate hovered over 4.08 before the Monetary Policy Committee (MPC) meeting. In other words, the markets had already priced in the 50 basis points hike ahead of the rate decision.

Some analysts had argued that a 50 basis point hike would not have been able to ensure stability in the exchange rate in the medium term. Some bank analysts, on the other hand, had suggested that a 75 basis hike would only be enough to weather “the next global turbulence.” They noted that the lira already tended to lose value, thus, this rate hike was needed to prevent the further depreciation of the local currency.

The Central Bank opted for a 75 basis points hike, because the market players were expecting a 50 basis points rise and the national lender also wanted to deliver a positive surprise. Some also argued that the Central Bank had the preliminary information that the April inflation would be high, thus this information played a role in the bank’s decision to hike the rate. In fact, the statement released after the MPC meeting underlined elevated levels of inflation and inflation expectations.

Thus, we can conclude that the Central Bank delivered a rate hike above market expectations because it wanted to buy time. The upcoming June elections also played a role here. In other words, this was a front-loaded move by the national lender.

Fluctuations

Apparently, the decision made by the Central Bank aimed at buying some time did not satisfy the markets. Because there are concerns about the high inflation and the current account deficit as well as the global market conditions.

Bankers I spoke with after the rate hike said the exchange rates would remain at those current levels until the next global turbulence and in the event of a global turmoil the local currency would depreciate again. Bankers also noted that the exchange rates may decline, thus they expect the rates to fluctuate. “However, the main direction will be upwards for the exchange rates,” they added.

The Central Bank on April 25 kept the borrowing, marginal funding and one-week repo rates at 7.25 percent, 9.25 percent and 8 percent, respectively. However, it lifted the late liquidity rate, which the Central Bank has been using as the main instrument to fund the market, to 13.50 percent from 12.75 percent.

Some bankers had expected the Central Bank to start to simplify its interest policy and lift the lower rates. Those expectations did not materialize.

To summarize, it is questionable if the Central Bank’s move was enough, but it certainly is a right move. In terms of the Central Bank’s independence, it was also a right move. However, we have reached a point that such corrective measures fail to yield results.