Turkish central bank signals more tightening possible, lira weakens

DENİZLİ - Reuters

REUTERS photo

The Turkish Central Bank will closely monitor pricing behavior and implement further monetary tightening if needed, its governor said on March 8, but the lira weakened in apparent disappointment he did not give a clearer signal on rates.

Governor Murat Çetinkaya’s comments, at a conference in western Turkey, came just over a week before the bank’s next rate-setting meeting and helped trigger a lira slide of more than 1 percent against the dollar.

The bank has taken unorthodox tightening steps to stem rising inflation and defend the lira after a slide at the start of 2017, but has not raised its policy rate since last November. Its next rate-setting meeting is on March 16.

“Heightened global uncertainty necessitates a cautious monetary policy stance. Accordingly, pricing behavior will be closely monitored and further monetary tightening will be implemented if necessary,” Çetinkaya said.

The bank is tightening liquidity, pushing the average cost of funding up by 20-25 basis points in the last week to a five-year peak against a background of double-digit inflation and Federal Reserve rate hike expectations. Since January, the funding rate has risen 225 basis points.

The lira weakened as far as 3.7310 against the U.S. currency after Çetinkaya’s presentation from 3,6770 beforehand. The main share index fell 0.7 percent.

“Probably, market players were expecting a stronger message from the CBT,” said BGC Partners chief economist Özgür Altug, forecasting it will have to tighten more if the Federal Reserve hikes rates next week, as expected.

“However, because of the approaching referendum an outright policy rate hike might not be on the agenda,” he said, referring to an April vote on constitutional reform.

At its last monetary policy committee meeting on Jan. 24, the central bank hiked its overnight lending rate by 75 basis points to 9.25 percent and the rate at its late liquidity window to 11 percent from 10.

The bank shied away from raising its main repo rate, failing to ease concerns about its independence. Erdogan regularly exerts pressure for lower rates to boost flagging growth.

Altuğ said the central bank could raise its late liquidity window rate to 12 percent from 11 percent.

To tighten liquidity, the central bank has this week reduced the level of funding which it supplies at 9.25 percent to 12 billion liras from 22 billion last week, meaning it was likely to provide more funding through the late liquidity window rate.

Çetinkaya also said lira depreciation might lead to upside inflationary pressure in the short-term but inflation was expected to trend downward by the middle of the year.