THE QUESTION is not whether the Central Bank will increase the interest rate on 19 November or not, the question is how much.
Following the change in leadership at the Central Bank last weekend and the resignation of the Minister of Treasury that is believed to be closely related to it, expectations rapidly increased. It is because of that expectation that the TRY gained a record value the previous week. The developments regarding the coronavirus vaccine also had an impact on this advance. Although some of this valuation was lost, the foreign exchange is still below the record level it reached previously.
There are a few factors that raise expectations. First is the appointment of Naci Agbal as the new Central Bank Governor, someone who reassures the markets although he has no experience in banking and, indeed, central banking. This change was welcomed since Agbal is the successor of someone whose credibility was at an all-time low.
But the question as to what Murat Uysal failed to do that cost him his job remains unanswered. Is there a reason for this dismissal that reaches back to the U.S. and the Halkbank case?
The Central Bank’s statement that said it will take the necessary steps for the market and become more transparent was regarded as a good start. The statement that developments will be monitored until the Monetary Policy Council (MPC) meeting on November 19 revealed that there will be no change in the interest rate until this date and thus, all attention is on next week.
RETURNING TO THE POLICY RATE FIRST
The first decision that the Central Bank needs to take at the MPC meeting on November 19 will probably be a return to the policy rate.
The Bank gave up on the policy rate since it did not want to seem like it was raising the interest rate and shifted to a late liquidity window during the previous MPC meeting on October 22.
The interest rate, showing the average of funding through traditional auctions and the funding from the LLW, gradually increased and reached the LLW upper limit of 14.75%. The average funding cost, in other words the actual interest rate, reached 14.20% on November 9. Thus, the difference between the upper limit interest rate decreased to 0.55 points. This difference will close gradually until November 19.
The rate hike may be 4 or 5 points, but what then?
It will be a big surprise if the Central Bank decides not to return to the policy rate again following the MPC meeting. Besides, it’s not an extraordinary step; it’s relatively normal. Would an inefficient, meaningless and unused funding channel policy rate exist? Hence, the first thing to do at the November 19 meeting is to return to funding through LLW’s weekly repo rate. Let’s sum up what to expect from the November 19 meeting:
• Return to the policy rate in funding.
• Pushing the policy rate close to 14.20%, the actual interest rate (the last known rate). This means a 4-point rate hike.
• Considering a front-loaded interest rate hike, which was the favorite phrase for a time, the rate hike can reach 5 points.
• The difference between the weekly repo rate, overnight funding and LLW, which was 1.5 points each and later changed to 1.5 points and 3.0 points on October 22, can return to the previous level. The decision to hold the rate at the latter levels on October 22 should not be regarded as odd because if the interest rate is raised by 4 points and the policy rate is increased to 14.25%, the LLW rate would rise to 18.75%, which makes no sense. What’s reasonable is not to regard the LLW as a punishment rate and the margin to be raised to 1.5 points.
• If the policy rate is raised by 4 points to 14.25%, the Central Bank’s overnight lending rate would become 12.75%.
• These may happen, but what then? If we could solve our issues by a rate hike, a rate hike could occur today and a new Turkey, free from all its issues, would emerge the next day! If the mentality doesn’t change fundamentally, we continue to play games with the interest rate.
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