THE CENTRAL BANK increasing the one-week repo rate, also known as the policy rate, to 10.25% from 8.25% is in practice not an increase; it’s a rate cut operation.
This 10.25% rate will probably not be implemented, at least for now. The apparent increase will allow the interest rates on other fundings related to the weekly-repo rate to increase.
If the Central Bank was funding the markets through an 8.25% rate, the 10.25% would signal a significant increase. But we know that the de facto interest rate is well above 8.25%.
The Central Bank funded the market with a 10.65% interest rate on September 23. They once again used the late liquidity window and provided TRY 25.5bln in funding. The funding from the late liquidity window accounted for half of the funding made through quotation and nearly 10% of the total funding. So if the Central Bank reduces the 10.65% average funding cost to the new weekly repo rate of 10.25, can this be called a rate increase?
WHEN DID A RATE CUT BECOME TIGHTENING?
The economy is recovering through the impact of loans and this hurts inflation, the Central Bank said in a statement after the Monetary Policy Committee meeting last week. The Central Bank stated the following: “Pandemic-related supply-side inflationary factors were expected to gradually phase out during the normalization process and demand-driven disinflationary effects were expected to become more prevalent. Yet, as a result of fast economic recovery with strong credit momentum and financial market developments, inflation followed a higher-than-envisaged path. The Committee assessed that the tightening steps taken since August should be reinforced to contain inflation expectations and risks to the inflation outlook. Accordingly, the Committee decided to increase the policy rate by 200 basis points to restore the disinflation process and support price stability.”
All good, but you already funded the market from 10.65%, much above the 8.25%. And the interest rate you announced as part of a tightening policy stands at 10.25%.
This is what’s happened: the de facto rate has decreased but they are still calling it tightening.
THE NIGHTLY INTEREST RATE IS 11.75%
As part of a decision taken in May 2018, the Central Bank only announces the weekly repo rate and the nightly interest rate. The late liquidity window interest rate is automatically determined per the weekly rate.
After the weekly repo rate was increased to 10.25%, the late liquidity window interest rate rose by 1.50 points to 11.75% and compared to the nightly interest rate, the late liquidity window rate increased by 1.50 points to 13.25%.
If the Central Bank is unable to reduce the average funding cost from 10.65%, the other rates will take effect in funding.
Even the average funding cost, which has been increasing lately to reach 10.65%, is not enough to put out the foreign exchange fire in the market. The Central Bank is not expected to fund the market from a 10.25% interest rate. This would add fuel to the embers. At this point, the Central Bank seems like it will slide the funding to the 11.75% nightly lending channel. Funding through the traditional tender channel should be expected to continue. The interest rate on these tenders currently stands at 11.50%.
Sometimes, 0.50 point and 0.75 point differences mean so much, just like last week’s interest rate decision.
Now, did the Central Bank increase the interest rate? On the surface it did. So if the name is “Interest-rate increasing Central Bank” and if the interest rate was increased to 11%, instead of 10.25, then it would be above the average funding cost. At least the ‘claptrap increase’ criticism would not arise.