Turkey\u2019s central bank specialises in Solomonic decisions. Like the Biblical Jewish king, the bank\u2019s approach to thorny monetary and financial questions is to give a bit to both sides in a dispute. The question, is, however, whether it cuts in equal halves.<\/p>\n
![\"General](\"https:\/\/www.turkishnews.com\/en\/content\/wp-content\/uploads\/2013\/02\/Turkish-lira.jpg\")
The bank displayed its split screen approach again on Tuesday, announcing it was inching down interest rates by 25 basis points (bringing its borrowing rate to 4.5 per cent and the lending rate to 8.5 per cent), but also introducing tougher reserve requirements on banks. This followed a near identical decision in January.<\/p>\n
In the eyes of Tim Ash at Standard Bank, such hyperactive moves help put the bank \u201cprobably at the front of the pack in running the most complicated monetary policy the world has ever seen.\u201d In a less confused vein, he adds: \u201cThe combo of lower policy rates to try and deter hot money inflows and prevent the over appreciation of the lira and macro prudential policy to counter the impact on domestic credit growth continues.\u201d<\/p>\n
The tactic of cutting interest rates while putting measures in place to stop bank lending getting out of hand is one Ankara started a few years ago as it wrestled with the country\u2019s then runaway economy.<\/p>\n
Today, however, the Turkish economy has slowed down considerably. In Tuesday\u2019s note, the bank says \u201crebalancing between the domestic and external demand continues as envisaged\u201d, adding that domestic demand is following \u201ca moderate pace\u201d.<\/p>\n
That loss of economic speed infuriates some politicians, notably Zafer Caglayan, economy minister, who complains that growth last year was just 2.5 per cent, in comments clearly directed at the central bank.<\/p>\n
The minister argues that the country could be growing at 6 per cent without inflation or the current account deficit being a concern.<\/p>\n
Nor are Ankara\u2019s central bankers necessarily immune to calls for higher growth. Murat Ucer of GlobalSource Partners in Istanbul notes a certain asymmetry in the bank\u2019s approach.<\/p>\n
To begin with, there is the question of whether the growth in lending or the currency\u2019s valuation is the more pressing issue.<\/p>\n
Ucer sees a contrast here. First there is credit growth \u2013 currently at an annualised rate of over 20 per cent compared with a target of 15 per cent. Then there is the lira\u2019s real exchange rate, which he notes is \u201cbarely past\u201d the 120 mark (in an index the bank calculates) that the bank holds warrants monetary easing to bring the currency down.<\/p>\n
He adds: \u201cThe \u201cmix\u201d that entails lower rates\/higher reserve ratio requirements on the Turkish lira side is also not doing much \u2013 at least so far \u2013 in curbing credit growth.\u201d<\/p>\n
Inflation expectations also play a big part. Ucer notes a difference between the language of the bank\u2019s January statement, which said core inflation indicators were \u201cexpected to continue their downward trend\u201d and Tuesday\u2019s announcement, which held that they were \u201cexpected to follow a mild course.\u201d In theory \u201ca mild course\u201d could be in either direction.<\/p>\n
As a result, Ucer detects a \u201cpro-growth bias\u201d in the bank\u2019s deliberations.<\/p>\n
That may not be too surprising. At some point you have to decide whether to blow on the fire for heat or on the soup to cool it. But it is not to everyone\u2019s liking.<\/p>\n
For instance, Ilker Domac at Citibank predicts that the bank will have to return to orthodox monetary policy, because of factors such as inflation, which pushes the real exchange rate ever higher as the nominal exchange rate fails to keep pace. It could be a question of history repeating itself, he argues.<\/p>\n
After all, last time around Turkey\u2019s bout with unorthodoxy ended with a dramatic increase in interest rates.<\/p>\n
via Turkey: the central bank and conflicting signals | beyondbrics.<\/p>\n","protected":false},"excerpt":{"rendered":"
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