Central Bank to try to get genie out of bottle

Turkish Central Bank is set to reveal a five-item plan today to defend lira and support price stability. Economists speculate on probable moves as one says the bank may announce a more flexible inflation rate goal
Shoppers are seen at a newly opened mall in the southern province of Hatay. The Central Bank warns about a chigh inflation risk. AA photo

Shoppers are seen at a newly opened mall in the southern province of Hatay. The Central Bank warns about a chigh inflation risk. AA photo

Turkish markets are anticipating a Central Bank decision today to address price stability and inflation risks on the heels of the Turkish Lira’s four consecutive days of growth against the U.S. dollar.

“We do not expect the bank to make a highly surprising move to alter the course of the currency, but [rather] a reiteration and determination to keep the volatility at manageable levels while avoiding a disorderly depreciation,” Gülbin Çakır of Morgan Stanley said in a note to investors. “The actions taken so far demonstrate that the Central Bank has the capacity and willingness to do this.”

Central Bank Gov. Erdem Başçı is expected to release his institution’s “five-item plan” sometime today.

Speculating on the bank’s likely actions, the Morgan Stanley report said a declaration of a “tightening bias” – a reiteration to tighten the amount of lira liquidity the bank provides to the system and change the lending rate on certain days – were possible.

“Moreover, the Central Bank might mention some of the planned (if any) regulatory actions that might give more balance sheet room to maneuver for banks. Equally important, the bank is likely to underscore the sufficiency of foreign exchange reserves and possibly mention some measures to fortify the level,” it said.

The Central Bank yesterday tightened liquidity in money markets via an auction of one-week repo as it sought to reduce the supply of liras.

The bank offered 12 billion liras of the repo, compared with the 15 billion liras due today from a week ago. The bank also lent 2.7 billion liras in overnight repo a day earlier that was repayable yesterday.

The bank may announce a more flexible inflation rate goal for a longer term, instead of a fixed target, according to Nurhan Toğuş, chief economist at Istanbul-based Ata Investment. “I expect the Central Bank decision will both strengthen the lira and pressure effective interest rates,” she told the Hürriyet Daily News during a phone interview yesterday.

Özgür Altuğ, chief economist at BGC Partners, said the bank was not close to increasing the policy rate or announcing that its new policy rate was an overnight lending rate instead of a one-week repo rate. “Cutting the lira liquidity will naturally force the banks to tap the overnight lending facility of the bank … it is more costly now,” he said.

Another option is a further lira squeeze, he added. “This commitment will make clear that the bank is keen on increasing the overall interest rates in the market, including the deposit and loan rates in order to make the lira more attractive and in order to slow down economic activity further,” he said.

The lira traded at around 1.8040 per U.S. dollar yesterday, up from 1.8170 a day earlier.

Tuesday, October 25, 2011
ISTANBUL