EconoMonitor

The Kapali Carsi

Surely you’re joking, Mr. Basci!- on Turkish monetary policy

First, of all, it is not Mr. Basci, it is Dr. Basci, as Indiana’s sidekick insisted, but so was Feynman, or maybe not- I think the incident that gave rise to the title of the book happened while he was still in grad. school. Actually, Dr. Basci was not even at today’s Central Bank of Turkey (CBT) regular meeting with economists, but I just liked the title:) Your friendly neighborhood economist is considered as “press” and therefore banned from those meetings, but he nevertheless always manages to get the scoop by talking to his friends who are there.

While you can read all the details in my friend Ozlem’s research note (yep, she is one of my spies there, but only one of several) for Ata Investment, here are some highlights:

First, CBT emphasized that it will continue with tight monetary policy. This is where my post gets its title from, as the CBT’s effective funding rate is 6.3 percent! This is actually an average rate; the overnight repo, which you could think of the marginal rate, is 5.10 percent:

To put this into perspective, note that yearly inflation is 8.9 percent. But the CBT defined sometime ago that rates above the weekly repo, aka  the rate formerly known as the policy rate (yep, just like the artist formerly known as Prince) of 5.75 percent would qualify as tight policy. So according to their definition, the policy is tight! Well, well:)…

The second big bullet point from the meeting is that the Bank notes third quarter growth will be weak. No shit Sherlock, especially given some recent indicators. For example, have a look at the Ankara think-tank TEPAV’s retail sector index…

…. which is at its lowest level since June of last year. BTW, the Bank also noted that the adjustment in the current account has slowed considerably, but that if growth does stay low, the improvement will continue- because of the country’s external financing-dependent model that everybody, or at least anybody who has read my stuff, knows about…

OK, my third big point is that the Central Bank is not worried at all from yesterday’s higher-than-expected inflation print. This is because the Bank does not see any demand pressures building. For example, Hakan Kara, the Bank’s chief economist,  noted that credit growth may be lower than the projected 14 percent yoy at the end of the year. Of course, you may argue that the Bank’s narrowing of the corridor, which is now almost a sure thing, and lower rates in general, would boost demand and therefore inflation. Kara addressed that concern by posing a question to the banker who asked that question: “Does the corridor affect consumer or corporate lending rates?”. When the banker answered “corporate”, Kara said that this was the answer to the original question. For people like me who are not as sharp as a nail like Kara, here is the explanation: Consumer lending is funded with wholesale funding and swaps, whereas corporate lending with domestic funds (deposits and CBT funding). I think this approach is far too simplistic and even if it is right, it may not be a static relationship, but then again I am not the chief economist of a central bank for a reason!:).

Speaking of deposits: Kara (or someone else from the CBT”s top brass, gimme a break, I wasn’t even there) noted that the wedge between deposit and lending rates has widened to around 3.5 percent, mainly on the back of the drop in deposit rates. They expect this wedge to narrow as lending rates fall. So if you are like me, looking to borrow in the near future: Just hold your horses for a month or two!!!

Coming back to monetary policy: Note that inflation is not the bank’s main concern at the moment, so even if it starts to edge up, the Bank may not respond with tighter(er) (since its policy is supposed to be tight anyway) rates. As I argued in my latest Hurriyet Daily News column, I believe the deciding factor of whether the corridor will narrow will be capital flows.  In fact, the Bank actually admitted, in answer to a question, that excessive capital flows could lead it to cut the lower band of the corridor. I just go a step further by arguing that even the upper band will be decided by inflows…

I am sure that if I looked through my notes, taken during my phone chats with my friends who were at the meeting,  I could find a couple of more interesting points, but I am really tired, so I’ll just call it the day…

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