May 28, 2018 / 7:40 AM / 10 months ago

UPDATE 5-Turkey central bank says to return to single rate, lira rallies

(Recasts, adds details)

By Nevzat Devranoglu

ANKARA, May 28 (Reuters) - Turkey’s central bank said on Monday it would return to using the one-week repo rate as its benchmark, the latest move by authorities to reassure investors about the direction of monetary policy and give the ailing currency a boost.

At an emergency meeting last week the bank hiked its late liquidity window rate, the highest of the four interest rates it uses, by 3 percentage points to 16.5 percent. That followed a 20 percent tumble in the lira this year on deepening concerns about President Tayyip Erdogan’s grip on monetary policy.

For years the central bank has relied on multiple rates to set borrowing costs, creating a complex system that economists say has made policy less predictable. It has funded the financial system through the late liquidity window for months, all while keeping the repo rate steady at 8 percent.

The central bank’s unwillingness to use the repo rate has exacerbated concerns that it is less than independent. Erdogan, a self-described “enemy of interest rates” has repeatedly called for lower borrowing costs to fuel credit and construction.

The bank said in a statement the repo rate would be set at 16.5 percent and would once again be regarded as the main rate. The new framework would take effect on June 1, it said.

“We think conducting funding through a single rate, the weekly repo rate, has increased predictability and sends a powerful signal to the markets that the tight stance will continue,” Is Investment economist Muammer Komurcuoglu said.

The lira firmed 2.4 percent to 4.5950 against the U.S. dollar, putting it on track for its best one-day performance in 16 months. It remains one of the worst performing emerging market currencies this year and touched a record low of 4.9290 last week.


The central bank said Monday’s move had completed its longstanding drive for “simplification” — the term it uses for the need to move to a single rate. The overnight borrowing and lending rates will be determined at 150 basis points below and above the one-week repo rate, it said.

The late liquidity window rate will be 300 basis points above the repo, it said.

Monday’s decision complemented the central bank’s rate hike last week, and was a positive, said Sebastien Barbe, global head of emerging markets research and strategy at Credit Agricole.

“It is opening the door to another tightening, another hike in interest rates in the coming weeks if there is a need to do it,” he said.

“Eventually they can eliminate all other rates and go with one rate but in the short term I would expect them to keep this kind of system ... because it gives them flexibility.”

The lira sell-off accelerated this month after Erdogan said he would look to take greater control of monetary policy following June 24 presidential and parliamentary elections. That deepened alarm among investors already disconcerted by Erdogan’s growing authoritarianism.

The central bank decision came after days of meetings among Turkey’s top economic ministers and intervention by the prime minister to convince Erdogan of the need for a sharp increase in interest rates, Reuters reported last week.

Authorities have since been on a push to reassure investors.

Murat Cetinkaya, the governor of the central bank, and Deputy Prime Minister Mehmet Simsek are due to meet with foreign investors in London on Monday and Tuesday.

They held a similar meeting with investors in Turkey on Sunday, at which Cetinkaya flagged the return to a more orthodox policy framework, according to one banker who was present.

Bankers said Simsek’s comments focused on the government’s achievements and plans, stressing fiscal discipline, tight monetary policy and its commitment to the market economy.

Simsek said in similar comments last week that Turkey would not try to push back against financial markets.

“We understand the concerns of the market. We understand the worries that investors might have,” he told broadcaster NTV. “We took the necessary steps to address these concerns and we will continue to do so.”

Additional reporting by Ezgi Erkoyun Writing by Daren Butler and David Dolan; Editing by Catherine Evans

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