CBRT's cosmetic move is not enough to save lira
Turkey’s Central Bank is fighting a losing battle, after its latest bid to protect its currency failed to prompt the support from investors that it hoped for. The move brought the CBRT closer into line with international standards, but could soon be irrelevant after elections on June 24.
While the CBRT has managed to reel in the lira from the dangerous highs of Tl4.90 following President Erodgan’s much cited televised address in which he outlined his intention to exert greater control over the central bank, its current trading level of Tl4.61 to the dollar does not suggest an investor base that is fully committed to the Turkish response.
On Monday, the central bank made what one analyst called a “symbolic move” to simplify the operational framework of its monetary policy.
Rather than using “unconventional” tools such as the facility for late liquidity provision as a roundabout way to control rates, the bank has designated the one-week repo rate as Turkey’s key policy rate. Simultaneously, it raised the policy rate to 16.5%, in line with the late liquidity window.
Turkey’s monetary policy framework has been famously complicated, with the three different facilities – the overnight lending rate, the one-week repo rate and the late liquidity rate – varying in importance over time.
This return to a more normal procedure is important, and points to the bank’s commitment to transparency, to a clear and open dialogue with investors. The reintroduction of a clear key rate should remove an element of guesswork on behalf of lira traders.
Focusing on a key policy rate also brings the country into line with the likes of the European Central Bank and the Bank of England and signals to investors that the CBRT is serious about conventional monetary policy.
The lira initially strengthened in response, opening on Tuesday at Tl4.55. This suggests the CBRT’s move was welcomed by the market, even if it was more like a cosmetic move than an actual change in monetary conditions. But, by mid-morning, it had weakened again to Tl4.61, suggesting investors are no clearer on the outlook for the lira than before.
The central bank's policy committee is due to meet again on June 7. If it agrees another 300bp rate hike, it could offer further support to the lira, according to analysts, but Turkey goes to the polls on June 24, and it is unlikely that Erdogan will continue to allow the pain of higher interest rates to be inflicted on his electorate.
While it is good to see the bank taking a step towards conventional policy, particularly one that appears to contradict the preferences of the president, ultimately, Turkey's interest rate decisions are becoming increasingly political — and the market’s distrust of Erdogan outweighs its belief in the bank’s policy makers.