Tuesday, January 22, 2013

Turkey shifts rate corridor down, holds benchmark rate

    Turkey's central bank cut its overnight lending and borrowing rates by 25 basis points but kept its benchmark one-week repo rate steady at 5.50 percent, moves that were expected by markets, and said this would give it flexibility in light of ongoing uncertainties in the global economy.
    The move by the Central Bank of the Republic of Turkey continues last year's policy of adjusting its interest rate corridor, which it can vary daily to control exchange rates and capital flows.
   The overnight lending rate, which forms the ceiling of the corridor, was cut to 8.75 percent from 9.0 and the borrowing rate, which forms the bottom, was cut to 4.75 percent from 5.0 percent.
   The bank also raised its reserve requirements for deposits of varying maturities. The requirement on  foreign exchange deposits of up to one year, for example, was raised by 50 basis points to 12.0 percent while the requirement for one-year lira deposits was raised by 25 basis points to 6.25 percent.
    Last year the central bank kept the benchmark repo rate steady until the last meeting of the year in December, when it cut it by 25 basis points, the first change in the repo rate since August 2011.
    A drop in inflation paved the way for the central bank to trim its overnight rates with inflation hitting a year low of 6.16 percent in December, evidence that inflation is trending downward, the central bank said. At the end of 2011, inflation hit 10.45 percent.

    However, the central bank has said that it expects inflation to remain above its 5.0 percent target for some time due to higher administered prices.
    Turkey's Gross Domestic Product expanded by only 0.2 percent in the third quarter from the second for annual growth of 1.6 percent, the lowest quarterly growth rate since third quarter 2009.
    For 2013 the central bank is expecting growth of 4 percent or above.


The Turkish economy recorded spectacular expansion in 2010 and 2011, with 8.9 and 8.5 percent growth, to rank among the world's fastest-growing economies.
But its expansion started slowing down in late 2011, with a growth rate of 5.2 percent -- which was painted as a healthy easing of business activity.
The Turkish economy posted markedly slower growth of 1.6 percent in the third quarter of 2012 from the same period a year earlier, official statistics revealed early this month.
The third quarter official result pulled down nine-month growth in Turkish gross domestic product to 2.6 percent, which was well below the official forecast of 3.2 percent.
Government forecasts expect 4 percent yearly growth in 2013 and 5 percent each in 2014 and 2015.

Turkey Central Bank Unveils New Tool to Limit Bank Debt Risk

Turkey’s central bank announced a new policy tool today to limit risks of excessive debt in the banking system by placing higher reserve requirements on banks that fail to meet specified leverage ratios.
The bank will begin relying on a new leverage ratio together with the capital adequacy ratio to guard against an expansion in debt, central bank Governor Erdem Basci said at a press conference in Ankara today. The measure will require banks with leverage levels below 3.5 percent to hold additional reserve requirements that will increase as the leverage ratio decreases.
The leverage ratio is a measure of a bank’s equity divided by its liabilities plus off-balance sheet items, the central bank said in a report on its website today. Banks with a leverage ratio of less than 3.5 percent will be subject to additional reserve requirements of as much as two percentage points starting in 2014, Basci said.
The move shows the bank’s determination in preventing systemic risk in the banking system and will have little impact because banks are not excessively leveraged, according to Emre Tekmen, an Istanbul-based economist at Turk Ekonomi Bankasi, BNP Paribas SA’s Turkish unit.

Signaling Effect

“It has some signaling effect,” Tekmen said in response to e-mailed questions today. “The market already knows that macro-prudential measures will be more active in 2013.”
Only three banks in Turkey have a leverage ratio below 5 percent, Basci said, and none have a ratio below 3.5 percent. He said that at the end of 2014, the threshold would be increased to 4 percent and by the end of 2015, it would increase to 5 percent. Most banks’ ratios are above 7 percent, he said.
The chances of the new leverage ratio being used are “quite slim,” Cevdet Akcay, chief economist at Yapi & Kredi Bankasi AS, the bank part-owned by Italy’s UniCredit SpA (UCG), said in a phone interview from Istanbul today. “It’s a new policy tool, but it’s not going to be extremely significant.”
These measures are part of a broader global trend in which “macro-prudential measures will be used more,” Aksay said. “In the past, monetary and fiscal policies were applied, now it’s going to be the new tool kit with monetary, fiscal and macro- prudential policies.”

Preventive Measures

The loans-to-deposit ratio among Turkish banks was 104 percent, Banks Association of Turkey General Secretary Ekrem Keskin told reporters in Ankara on Dec. 14. A ratio of above 100 percent means banks rely on foreign funding to finance loan growth.
“In Turkey, when banks expand their assets they do so by increasing indebtedness,” Basci said today. “An excessive risk-taking scenario in which the leverage ratio of many banks would decline rapidly confirms the need to take preventive measures.”
Last year, rapid consumer credit expansion helped widen Turkey’s current-account deficit to about 10 percent of gross domestic product. That contributed to an 18 percent loss in the value of the lira and an inflation rate of 10.5 percent. Basci said today that preventing loan growth from exceeding 15 percent would “support price and financial stability.”


The bank will remain committed to inflation targeting, while monitoring the so-called real exchange rate index and credit expansion as key ingredients in price stability, Basci said.
The real exchange rate index measures the lira against the currencies of its main trading partners. A reading of 130 or above would signify “extreme volatility,” Basci said today. Last month, Basci said that a reading above 120 would be cause for concern as it suggested the lira was becoming overvalued. The measure was at 119.2 in November.
The central bank’s new announcement is consistent with a monetary policy stance that will “continue to be characterized by short-term interest rates and tight macro-prudential measures,”Inan Demir, chief economist at Finansbank AS, the Istanbul-based lender owned by NationalBank of Greece (TELL), said in an e-mailed report today.
“We foresee domestic demand accelerating in the upcoming period, which would translate into excessive loan growth and external balance deterioration in the absence of policy response,” he said.

IMF Says Turkey’s Central Bank Should Focus on Inflation Control

By David Neylan and Sandrine Rastello on December 21, 2012

The Turkish central bank should be more focused on meeting its inflation target because its multiple monetary policy tools are “blurring signals,” the International Monetary Fund staff said.


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Is Christine Lagarde Right for the IMF?

While the monetary policy framework put into place by Central Bank Governor Erdem Basci aims to achieve both price and financial stability, inflation has remained “well above target,” IMF economists said in an annual assessment of the country’s economic policy dated Oct. 31 and released yesterday. It recommended a return to “a more conventional framework.”
“The new framework, relying on a battery of novel instruments to gain degrees of freedom in segmenting domestic and international interest rates, has not yet proved its superiority,” the IMF wrote.
Monetary policy in Turkey has been led in a way the IMF said in the report is “unconventional,” relying on a variety of instruments instead of one interest rate in an attempt to stem capital inflows. The bank forecast Oct. 24 that inflation will reach 7.4 percent by the end of the year. Its target is 5 percent.
“It is the ability to achieve the inflation target and anchor expectations that ultimately determines the success of monetary policy, and so far inflation has remained well above the target,” the report said. “While the new instruments may each seem appealing, as a whole, they are blurring policy signals and may be weakening the monetary transmission mechanism.”

Turkey Yields Jump Most in 3 Months on Interest-Rate Corridor

By Selcuk Gokoluk on December 19, 2012

Turkey’s bond yields jumped the most in more than three months after the central bank left its overnight borrowing rate unchanged, signaling a less dovish monetary policy than investors’ expected.
Yields on two-year benchmark debt rose 10 basis points, or 0.1 percentage point, to 5.91 percent, the biggest advance since Sept. 3, by the 5:00 p.m. close in Istanbul, paring this year’s gain to 510 basis points. The lira weakened 0.2 percent against the dollar at 1.7814, reducing its gain this year to 6.1 percent, the third-largest among 10 emerging markets in Europe, the Middle East and Africa.
The central bank, led by Governor Erdem Basci, kept the bottom end of its so-called rates corridor unchanged at 5 percent yesterday. The median estimate of seven economists surveyed by Bloomberg was for a 25 basis-point cut. Basci maintained the overnight lending rate at 9 percent and lowered the one-week repurchase rate by 25 basis points to 5.5 percent, in line with estimates.
“‘The central bank was not as dovish as expected at yesterday’s Monetary Policy Committee meeting,” Cengiz Erguen, a director of local markets trading at Commerzbank AG, said in e-mailed comments from London. “The 25 basis-point cut at the benchmark rate was very cautious and everyone had been betting on a 25 basis cut at the lower end of the band and people got slightly nervous when this did not come.”

Economic Growth

Turkey’s economic growth fell to 1.6 percent in the third quarter, the slowest pace since the 2009 recession.
Credit growth showed “a marked increase” and the contribution of domestic demand to economic growth “is expected to increase in the forthcoming period,” the bank said yesterday.
“The market saw the text from the central bank as very hawkish,” said Sercan Kiliclar, a fixed-income trader at Akbank TAS (AKBNK) in Istanbul, said in e-mailed comments. “There will be no interest-rate reductions driven by economic growth.”
Turkey’s economic growth may slow to 3 percent this year from 8.5 percent in 2011, according to the median estimate of 24 analysts on Bloomberg.
Basci introduced the rates band in October of last year that allows him to adjust interest rates on a daily basis. It was created to balance above-target inflation, slowing economic growth and high volatility of the lira.


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