Emerging Policy: Turkey bakes

February 21, 2013

Turkey took another step in the currency battle this week, cutting two of its three main interest rates to prevent speculative flows, yet also raising reserve requirements to cool domestic loan growth.

Policymakers in both the emerging and the developed worlds have been keeping monetary policy loose to stop their currencies rising to uncompetitive levels, even though G20 finance ministers last weekend said there would be no currency war, and made a commitment to refrain from competitive devaluations. The mood does appear to be softening, with the Fed’s minutes yesterday showing a number of officials think the central bank might have to slow or stop buying bonds.

The latest rate move by G20 member Turkey was largely expected, but it still took the lira to a low for 2013 on Thursday – aided by the Fed minutes – and took two-year Turkish bond yields close to record lows.

The Turkish central bank, however, wants its moves to be seen as policy tightening because of the reserve requirement hikes, according to Tim Ash at Standard Bank.

This is a hugely complex monetary policy framework, but they seem to feel comfortable making minute adjustments here and there across the range of tools to get to their objectives…guess it’s like baking a cake and figuring out what shelf to put it on, how hot the oven should be, and maybe how long to bake it for… but this is like a new mix that no one has ever used before, and maybe they are cooking two different cakes in the same oven, a souffle and perhaps a nice date and walnut number…

Thailand, meanwhile, kept rates unchanged at 2.75 percent yesterday, fending off government pressure for a cut to curb those same pesky speculative flows. But with price pressures seen rising later this year, some analysts are talking about a rate rise there.

Analysts at Capital Economics are less convinced:

Many now believe that the next move will be a rate hike. In our view, though, the global recovery is likely to falter and put rate cuts back onto the table. Note that the manufacturing sector accounts for some 40 percent of Thailand’s GDP and export weakness would quickly feed into this sector.

Over to Latin America, where expectations are pretty clear cut for a 25 basis point rate cut in Colombia on Friday to 3.75 percent, to spur growth in the region’s fourth largest economy.

And for next week, economists will have time to mull things over – the only emerging economy to decide on rates is Angola.


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