(Bloomberg) -- Turkey’s central bank will probably focus on draining excess lira liquidity and alternative tightening measures as it looks to keep interest rates on pause for a fourth straight month.
Economists surveyed by Bloomberg unanimously forecast the one-week repo rate will remain unchanged at 50% on Tuesday. Deutsche Bank AG and Bloomberg Economics are among those who expect additional policies that could range from higher reserve requirements for lenders to an increase in the lower bound of the central bank’s rate corridor.
With official borrowing costs unlikely to rise further, policymakers have turned their attention to the side effects of their efforts to replenish foreign-exchange reserves that resulted in billions of liras being pumped into the economy. The excess liquidity has been a drag on deposit rates and the cost of overnight funding, a worry for the central bank even after a turnaround in inflation in June.
“If the excess liquidity in the system persists due to foreign exchange purchases, a technical change in the interest rate corridor will be needed to maintain monetary policy tightness,” said Tepav, an Ankara-based think tank that includes former central bankers.
The bank, therefore, could raise its overnight borrowing rate — which makes up the lower end of its rate corridor — by 2 percentage points to 49%, Tepav said.
What Bloomberg Economics Says...
“We expect the statement to be a hawkish one, with policymakers highlighting the risk of a longer-than-expected hold at the current rate. The central bank may also announce a move to tackle lira oversupply in the market.”
— Selva Bahar Baziki, economist. Click here to read more.
Another option for the central bank would be to raise the amount of interest payments it makes to commercial lenders for their required reserves, Deutsche Bank said in an emailed report on Friday. That would encourage banks to park bigger amounts of lira at the monetary authority, draining some of the liquidity in the interbank market.
Inflation Path
Deutsche Bank expects the policy rate to remain unchanged until two consecutive cuts through December, while Goldman Sachs predicts the first easing move at the end of the third quarter.
Barclays Plc economists said that while they maintain their call for the central bank to wait until next January before lowering rates, “the risks are skewed towards an earlier cut, in November or December.”
Governor Fatih Karahan earlier this month delivered his most emphatic message yet to foreign investors worried about premature easing, saying he wants to ensure he can meet inflation goals beyond this year before discussing possible rate cuts.
“Any actions we take on policy rates should be calibrated so as to hit the inflation target in 2025 and beyond,” he said in an interview with Bloomberg.
Karahan targets 14% inflation by the end of next year, while households see the figure at 71.5% in 12 months, according to the central bank’s most recent monthly survey in June.
The bank sees that gap as a key challenge to overcome. Household habits forged by years of rampant inflation are leaving Turkey in a self-fulfilling cycle, where prices keep rising faster as expectations for higher inflation heat up demand.
Monthly price gains, the bank’s preferred gauge, slowed to 1.6% in June, the lowest level in over a year. The turnaround in inflation, driven by an aggressive round of hikes that lifted the benchmark rate by over 40 percentage points in less than a year, has been lauded by investors.
Moody’s last week upgraded Turkey’s credit rating for the first time in 11 years, citing improved credibility of the central bank’s monetary policy.
“The central bank not only maintains high interest rates but is also tightening credit availability,” Moody’s said on Friday.
--With assistance from Joel Rinneby.
(Updates with Barclays comment under ‘Inflation Path’ subheadline)
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