Turkish Monetary Policy Gets Really Exciting
Not that it was dull for the past year or so, especially since the Central Bank initiated its unconventional monetary policy last December. But things got really interesting yesterday with the usual announcement for the Inflation Report:
PRESS RELEASE ON PRESS CONFERENCE
The “Inflation Report” will be published on 26th of October 2011, Wednesday and a press conference will be held for the presentation of the Report at 10 am on the same day at the Conference Hall of the Head Office of the Central Bank of Turkey.
At the meeting, besides Governor Başçı’s presentation on the Inflation Report, a five-point action plan on price stability, interest rate policy, foreign exchange reserves policy, required reserves policy and financial stability, which will significantly reinforce the value of the Turkish lira, will be announced.
The first paragraph is standard, the second anything but!:) My first response was, WTF? We Turks love action plans; there was one to tackle the current account deficit, one to make a financial center out of Istanbul, you name it, but this is the first time I am seeing one for the exchange rate:)
My second response was, man these guys are serious. That’s at least what markets think, as the lira strengthened right away. Herein lies the dilemma: From the reports I have been reading, markets are really expecting hints of an interest rate hike at tomorrow’s Inflation Report. Anything less will be disappointing. But will we get that? I am really not sure at all, but I can tell what else could be on the agenda:
- More emphasis of tighter policy and that the Bank cares about inflation. The Bank could increase emphasis on liquidity management (tight liquidity) as well.
- The Bank could start paying interest on required reserves.
- The share of required reserves that could be held in FX could be increase to strengthen reserves.
- The reserve requirement on FX deposits
If you are thinking the last two are kind of contradictory, you are absolutely right! See what I mean now when I say the Bank is increasingly confusing:) Joking aside, regardless of what the Bank does tomorrow, there are some broad lessons from the last year or so of CBT actions. First of all, in monetary policy, simple is beautiful- you don’t want to confuse markets too much. I have heard from my friends at Roubini Global Economics that China is chasing multiple objectives as well, but those guys are swimming in reserves and current account surpluses. I just got an interesting report from Nomura comparing Israeli and Turkish Central Banks. I have saved it in my Playbook (I refuse to be an Apple fanboy) for in-flight reading tomorrow, but they make this simplicity point as well.
On a more general note, the CBT has been one of the frontrunners of new Central Bank thinking, as summarized in recent FT columns by Gillian Tett (also featured in the Economist) and Eichengreen, Rajan and Prasad. The paper Mrs. Tett is referring to is by someone who warned us of the impending dangers in the liquidity glut as early as 2003. And the authors of the other FT column are distinguished economists, who are referring to an influential Brookings paper co-written by a dozen or so well-known economists, including themselves. So I am sure they know what they are talking about. While it is tough not to agree that Central Banks should consider financial stability and that they need new tools, we must also be careful not to overdo it, i.e. load central banks missions they are not meant to deal with in the first place. If the Central Bank is worried about inflation, the current account, the exchange rate and credit growth at the same time, some of the goals are likely to be diluted. And that’s the predicament Turkish monetary policy is in right now. This may as well be my theme for my Hurriyet Daily News column next week.
Finally, it is important to note that the Action Plan and the Inflation Report will be released before Europe reveals its rescue plan. To me, this does not make sense at all. I know Inflation Report dates were decided almost a year ago, but they could still have waited until the Europeans and revealed the Action Plan the next day. I will have more to say on that after the Inflation Report & the Action Plan, trying to assess how the plan will fare depending on what Europe does.
But backtracking a bit, if you want a proper account of last Thursday’s rates decision, here’s what Citi has to say. The FT took on the Central Bank’s changing gears in a blog post, and a Bloomberg piece reporting Societe General’s rate hike predictions made the headlines, with Hurriyet Daily News taking it on as well.
Backtracking more, although I provided a nice graph, which included all the interventions, in the column, I got a couple of questions on the latest intervention back in 2006. Luckily, my friend Ozlem from Erste Securities had something to say on that:
After having opened a max USD 1.35bn selling auction and sold USD 750mn in the morning hours, the Central Bank directly intervened in the FX market and sold around USD 700-800mn to calm down the surge in FX rates. Exchange rate basket of equally weighted USD and EUR peaked at 2.2260 within the day, reaching its all-time high, eased below 2.2, following the move. The previous intervention was in June 2006 when a market turbulence was occurred after Ben Bernanke’s announcement of the continuation of policy rate hikes due to inflation risks. The currency depreciated by 9.5 from 1.744 in June 12, 2006 to 1.9104 in June 23 in basket terms. CBT calmed down the markets by three direct interventions of USD 2.1bn and two FX selling auctions of USD 500mn each between June 13-26, 2006. CBT was successful then, with exchange rate retreating back to 1.75by July 4th. The situation is somewhat different today with the ongoing market turbulence stemming from the global crisis, rather than a one-off exchange rate shock. That is why CBT is refraining from using its ammunition aggressively and opts for gradually using its tools to manage the FX market volatility.
Speaking on the intervention, a rumor started making the rounds early this week that there were two banks behind last week’s lira speculation. Since there are always bets in both directions, I have always had difficulty understanding the concept, but here’s what my investigations led to: The Morgans, i.e. J.P. Morgan and Morgan Stanley, were long-lira, which makes sense, since the former had written a report in that direction. On the other hand, the great vampire squid, aka Goldman Sachs, was selling below 1.8500. In any case, the two banks, whoever they are, have been blacklisted, as the rumor goes.
Speaking of being blacklisted: I might have been blacklisted by the Central Bank as well: I learned this afternoon that my request to attend the CBT’s monthly meeting with bank economists, to have some monetary policy questions posed by one of my consulting clients answered, was denied, on the pretext that the meetings are closed to the press. My weekly Daily News columns apparently classify me as a journalist! We are not amused!, as there are several bank economists and finance professionals who write regular columns in Turkish papers, and no one ever denies them access.The Turkish daily Dunya features finance types a lot, and skimming through their long list of columnists, I was able to spot nearly a dozen bankers and/or economists. Since I am not a rat, I won’t be giving away any names, but I am confident some of those make it to the meetings every month.
It doesn’t really matter, as I learn all the details, including the Governor’s jokes, right after the meetings.And I will have a friend ask my client’s questions. But as I said, we are not amused by this double standard. A couple of readers suggested I might have been blacklisted, which is quite probable, given the RGE Economonitor version of my latest column as well as my recent job application to the Central Bank, among other things, but another reader suggested there might be “an institutional bias against Besiktas supporters”:). Although PM Erdogan, FinMin Simsek and Econ. tzar Babacan are all avid Fenerbahce (the team we will destroy in two days) fans, I don’t know Governor Basci’s colors…
Finally, I need to fulfill a promise to a reader, who commented to the same column that may have sealed my fate with the Central Bank:
Dear Mr. DELİVELİ, Extremely nice article. I propose other remedy to tackle Lira. 1) Create “Repo” market for Govt bonds & 2) CB buys/sells $ in forward 3/6 months instead of Spot. This will help to manage liquidity gaps. K. Jamil
I am no hard-core finance guy, but the second suggestion seemed to me way too risky. It could as well backfire. I asked a few friends who know these things better than me, and they seem to agree with me. As for the first, it already exists, unless I misunderstood K. Jamil.
BTW, thanks to all the readers for the great comments to the Hurriyet Daily News columns. I am not as popular there as I used to be once, but I still regularly end up in the top ten list for most comments, as was the case last week:
I really appreciate them as well as respond to all comments in a timely manner, so please keep them coming.
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