Turkey Tightens Monetary Policy Further After Surprise Rate Hike
The central bank offered 5 billion liras ($660 million) through its one-week repo auction.
(Bloomberg) --
Turkey’s central bank offered local lenders just a fraction of their daily liquidity requirements from its cheapest funding window on Friday, tightening monetary policy further after raising rates unexpectedly this week.
The central bank offered 5 billion liras ($660 million) through its one-week repo auction, where the cost of money was raised to 10.25% in a surprise rate hike on Thursday. That’s going to force lenders to tap the monetary authority’s costlier tools to meet the rest of their funding needs, pushing the average cost of funding higher.
For weeks, the key one-week repo has been a benchmark in name only as policy makers used other channels to raise the cost of money and contain the lira’s weakness. Some investors were concerned that any signs policy makers were backtracking on this policy would effectively turn Thursday’s rate hike into a cut.
Turkish Policymakers Did the Right Thing; Now the Waiting Game
More than a month of tightening by stealth has pushed up the average cost of cash provided by the central bank to 10.69% on Thursday from as low as 7.34% in July. It’s been higher than Turkey’s new benchmark level since Sept. 11.
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“Thursday’s rate hike brings the repo rate closer to the effective borrowing cost, restoring some transparency to monetary policy operations. While ultimately doing the right thing by raising rates outright rather than tinkering with liquidity windows, the central bank’s credibility has taken a hit.”
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“The Committee assessed that the tightening steps taken since August should be reinforced in order to contain inflation expectations and risks to the inflation outlook,” the central bank said in the statement accompanying its rate decision.
Still, some investors remain wary that Friday’s tightening is only temporary. If policy makers return to offering much higher amounts through benchmark one-week repo auctions in the days ahead, the weighted average cost of funding could start dropping from current levels.
“It all depends on the day-to-day funding conditions that they will implement going forward,” said Cristian Maggio, the head of emerging-market research at TD Securities in London. “Even if it is a case of real tightening, how long will it last for? We have no guarantee that the Turkish central bank won’t start reverting to repo funding as soon as the lira enters a more stable path toward appreciation.”
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