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We attended the CBRT’s monthly
investor conference in Ankara yesterday. We were relieved to see
that our initial assessment on the new monetary policy outlook that
we sent out after the MPC decision was correct.
The CBRT remains
committed to its loan growth target of 15% and the decision to cut
upper band of the interest rate corridor by 100bp did not show an
easing bias. In fact, the Bank stated many times in the meeting
that they have a tightening bias. As we stated in our note on
Tuesday, the 100bp cut was a move to make the upper band of the
corridor more operational. The CBRT is of the view that liquidity
management would be more effective than RRR hikes in restraining
loan growth. Importantly, the Bank characterizes this move as a
step towards the normalization of the monetary policy. By focusing
on liquidity management instead of macroprudential measures and by
narrowing the interest rate corridor, the bank has taken a step
towards orthodoxy.
In this new system, the
Bank will try to discourage banks from extending loans by
tightening the liquidity conditions, occasionally forcing the banks
to borrow from the CBRT’s - now more relevant - ON lending rate of
7.5% (7.0% for the primary dealers). The decision to cut the amount
of 1-month repo funding is expected to increase the CBRT’s power in
this process. Remember that the Bank decided to cut the maximum
amount of financing provided by 1-month repo auctions to TRY1
billion from TRY2.5 billion. The Bank believes that shortening the
maturity of funding is a form of monetary tightening.
Importantly, the CBRT
states that they have already taken steps to tighten the liquidity
and this could be evidenced by three developments below. The Bank
expects this trend to continue.
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The ON money market
rates have increased from below 5.0% to around 5.50% in recent
days
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The CBRT has been
consistently reducing the excess liquidity in the market. The ratio
of liquidity provision through MOM to liquidity need of the banking
system is decreasing towards 1.0
-
Average maturity of
CBRT funding has been reduced to 14 days from 25 days in the last
two months
In short, we expect the
CBRT to focus more closely on daily liquidity management in the
coming weeks. While liquidity conditions may be eased temporarily
due to the quarter-end, we expect the Bank to tighten the liquidity
and let the ON rates fluctuate between 5.50-7.0% in the coming
weeks. The CBRT believes that tighter liquidity and weaker capital
flows will be enough to keep loan growth under control, but has
stated its readiness to take further macroprudential measures in
the form of RRR hikes if loan growth accelerates
further.
The CBRT thinks that
the global economic outlook has become more uncertain and the
resulting fall in risk appetite will likely contain capital inflows
to emerging markets. The bank believes that in this environment of
weak capital inflows, the reserve option mechanism (ROM) is a
better tool than RRR hikes to restrain loan growth. If the Bank had
hiked the RRR on FX liabilities, this would have reduced the FX
liquidity for all banks. However, by increasing the reserve option
coefficient, the CBRT has provided the banks with the flexibility
of either keeping their TRY required reserves in FX but with a
higher ROC or switching back to lira and keeping more of their TRY
required reserves in TRY. By this way, those banks with ample FX
liquidity will continue using the ROM and those with less FX
liquidity will switch to the lira. The Bank is hopeful that the ROM
is an efficient automatic stabilizer for the FX
market.
Coming to the external
balances and to the FX market, the bank expects the current account
balance to widen on the back of the recovery in domestic demand in
the first months of the year. However, the Bank is confident that
the existing policy framework will limit further deterioration. The
CBRT has recently been focusing less on the real effective exchange
rate and yesterday’s meeting was no exception in this regard. The
only statement they made came as a response to a question. They
said that they are fine with a 1.5-2% real appreciation of the
currency. On the whole, they sound quite happy with the current
level of the currency.
Finally, they sound
more cautious on inflation. They state that while weak global
demand and the commodity price outlook contains the upward
pressures on inflation, the impact of increases in credit and
domestic demand on the pricing behavior will be monitored closely.
Remember that they were always saying that inflation would continue
its downward trend in previous months. Now, their forecast path has
become more in line with our expectations. They expect yearly
inflation to remain stable in March. After a one-off decline in
April, they see inflation creeping upward until August. They expect
inflation to fall towards their end-year forecast of 5.3% only in
the last months of the year. This path surely supports the case for
tighter monetary policies in the short term.
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