Turkey’s central bank: still a slippery customer

October 20, 2011

The Turkish central bank has done it again, wrong-footing monetary policy predictions with its latest interest rate moves.

On Thursday, the central bank hiked its overnight lending rate by widening the interest rate corridor. While most analysts correctly predicted the central bank would leave its policy rate unchanged, few foresaw the overnight lending rate hike to 12.5 percent from 9 percent.

As Societe Generale’s emerging markets strategist Gaelle Blanchard put it:¬†“They managed to find another trick. This one we were not expecting.”

In August, the central bank shocked the market by cutting its benchmark rate despite inflation running well above its 5.5 percent target. Relying on higher banks’ reserve rate requirements to curb credit, it argued then that the rate cut was necessary to fend off the threat of a domestic recession heightened by a slowdown in global demand.

Initial market disapproval dissipated soon enough. Other emerging economies grappling with rising prices — including Brazil and Indonesia — also decided that the global recession threat was more significant than inflation.

Now, however, the Turks are warning of rising inflationary pressures.

Containing the weakness of the lira — down 11 percent since August despite foreign-exchange auctions to support the currency — is crucial in this respect.

Analysts say the central bank’s latest moves bring the interest rate tool back into its arsenal. A 4 percentage point rise in the lending rate would squeeze lira liquidity and make the carry trade expensive.

Despite the central bank’s more hawkish tone, analysts appear no more clued in as to the near-term rate direction.

For instance, both BNP Paribas and Capital Economics hail Turkey’s return to “orthodox” monetary policy. But BNP Paribas expects the central bank to raise its policy rate should risk sentiment worsen while Capital Economics sees rates kept on hold until 2013 when policy tightening is likely.


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