Slower Turkish Backdoor Tightening Prompts Questions by Barclays

(Bloomberg) --

The average cost of cash provided by Turkey’s central bank rose at a slower pace in recent days, prompting Barclays Plc economists to ask if it’s “behind the curve.”

Policy makers have avoided an outright interest-rate hike in response to greater currency volatility and instead looked for a backdoor way of containing the lira’s weakness. The central bank’s approach is effectively to tweak the cost of funding on a daily basis, modifying the amount of liquidity available to lenders across its various rates.

But after rising from as low as 7.34% in mid-July to 10.16% on Sept. 2, the central bank’s weighted average cost of funding then stabilized even as the lira continued to depreciate. “While the inflation outlook is deteriorating and lira volatility is increasing, the pace of monetary tightening has slowed down,” Barclays economists including Ercan Erguzel said in a report to clients.

• “We expect further upside pressure on CPI in the upcoming months due to increased TRY volatility recently”
• Barclays economists also challenged the Turkish central bank’s statements that its policies have helped to stabilize dollarization and loan growth
  • Despite “some initial signs of slowdown” in local-currency lending as of Aug. 28, total loan growth then gained further, adjusted for foreign-exchange fluctuations
  • “There has been some stabilization in FX deposits in the last few weeks, but it is early to conclude that the dollarization trend has reversed”
• NOTE: Lira’s Fall to Record Likely Heralds Worse to Come for Inflation
• NOTE: CBRT: Lira, Loan Developments Restrain Demand-Side Disinflation

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