Obtain the data you need to make the most informed decisions by accessing our extensive portfolio of information, analytics, and expertise. Sign in to the product or service center of your choice.
A lack of a further rate increase at its February policy
meeting has brought the Turkish central bank's commitment to
defensive monetary policy into question.
In particular, the lira has suffered in the days since the lack
of action, though it remains significantly stronger than its
late-2020 low-point.
IHS Markit continues to believe that given the public
proclamations from the central bank governor, monetary policy will
be kept tight throughout 2021.
The Turkish central bank pivoted to more defensive
monetary policy since November
Following the installation of current Central Bank of the
Republic of Turkey (TCMB) Governor Naci Aǧbal in early November
2020, the Bank has pivoted to more defensive monetary policy,
raising the main policy rate at the November and December policy
meetings by a total of 675 basis points. However, in the January
and February policy meetings, the Bank's Monetary Policy Committee
kept the one-week repo rate unchanged at 17.0%.
From October 2020 to January 2021, annual consumer price
inflation jumped from 11.9% to 15.0%. In its press release
alongside the February meeting, the TCMB acknowledges elevated
inflationary pressures, deriving from domestic demand, exchange
rate effects, rising global food and commodity prices, and growing
consumer expectations. To battle these upward pressures on prices,
the Bank pledges to maintain a tight monetary stance.
Along with a pivot to more defensive monetary policy, Aǧbal has
also returned to international norms in policy setting, abandoning
the Bank's daily adjustment in using overnight rates for funding
the market and instead returning to utilization of the one-week
repo rate, set monthly.
Under the previous governor, the TCMB had slashed the main
policy rate by a total of 1,575 basis points from mid-2019 to
mid-2020, pushing the one-week repo rate below the prevailing rate
of annual inflation as of January last year. At the same time, to
battle the negative economic impact of the COVID-19 crisis, the
Bank directed the financial system to dramatically escalate
domestic credit expansion. The strongly pro-growth cycle since
early 2019 undermined the stability of the lira.
By October 2020, the lira was depreciating rapidly without any
significant inflow of foreign capital. Moreover, the lack of
foreign capital inflows was presenting the TCMB severe short-term
debt repayment problems as the Bank had engaged in heavy short-term
swaps to rebuild its foreign currency reserves with which it drew
down to defend the currency. These issues prompted President Recep
Tayyip Erdoǧan to install Aǧbal in November and shift monetary
policy.
Despite a lack of a move in February, the Bank has
committed to defensive monetary policy
After the TCMB failed to raise interest rates once again at its
February meeting, the lira faltered in the days following.
Immediately prior to the February meeting, the lira traded at 6.959
per US dollar, up from its 6 November low-point of 8.469 per US
dollar. As of 26 February, the lira was back down to 7.377 per US
dollar.
The initial pivot in monetary policy provided a
stronger-than-expected lift to the lira from November to late
February. Markets reacted favourably to the normalization and
tightening of monetary policy under Aǧbal, IHS Markit believes that
markets immediately prescribed too much confidence in the Bank's
independence and that the rally of the lira was too vigorous. Aǧbal
was the third governor in just over four years, with Erdoǧan
showing little reticence in replacing the position ahead of the
appointees' four-year terms. We continue to believe that the
current defensive monetary policy is only being undertaken with
Erdoǧan's tacit agreement, despite what the president says
publicly. Should Erdoǧan grow uneasy with the difficult weak
economic growth, we expect he will lean on Aǧbal politically to
reverse policies.
Given continued political pressure, IHS Markit was unsurprised
that the TCMB held interest rates unchanged in February. There had
been some risk of another rate increase due to the
faster-than-expected acceleration of inflation in January. However,
the prevailing rate of inflation remained 200 basis points below
the level of the one-week repo rate, providing the Bank
justification for keeping interest rates unchanged.
Based on the concerns IHS Markit had that the market had
overcorrected from November to mid-February, IHS Markit had already
built into our forecast a resumption of depreciation in March.
However, the depreciation of the lira in the days following the
February meeting have been stronger than anticipated, prompted by
growing market concerns that -- indeed -- monetary policy was not
as independent as those markets initially believed.
Nonetheless, IHS Markit does not believe, either, that the TCMB
will bring an end to its recent defensive position. Aǧbal has
repeatedly, publicly pledged to not only maintain defensive
monetary policy throughout 2021, but has even promised to further
raise interest rates should inflation exceed the Bank's expected
path. These public pronouncements are surprisingly bold given
Erdoǧan's high-profile opposition to elevated interest rates.
With such public pledges from the governor - and based on our
assumptions of tacit approval from Erdoǧan -- IHS Markit is
maintaining our baseline expectations that TCMB policies remain
defensive throughout 2021. The main policy rates will not be
lowered at least until the third quarter, with the risk of another
rate increase now higher given the late-February lira losses. A
resumption of the rate increases in March would arrest the recent
lira depreciation at around 7.5 per US dollar, around which IHS
Markit had initially expected the exchange rate to have moved
following the monetary policy pivot. Absent of a rate hike in
March, the lira could slip farther, but likely remain at 8.0 per US
dollar or slightly stronger - equivalent to what it had been prior
to the second, December rate hike.
Posted 02 March 2021 by Andrew Birch, Associate Director, Research advisory specialty solutions, S&P Global Market Intelligence