Economists at the Economic Policy Research Foundation of Turkey (TEPAV) pointed out that banks were being funded with lower swap interest rates instead of the weekly repo rate, which negatively affected the success of monetary policy.
Ahead of the CBRT’s interest rate decision today, TEPAV criticized that the policy rate has lost its functionality with its current definition.
In its December Monetary Policy Review, the agency pointed out that the weekly repo rate has lost its status as the policy rate and stated that the implementation should be reviewed for the success of policies aimed at “rationalization”.
TEPAV experts pointed out that the Central Bank has been funding banks through lower-interest TL-for-FX swaps instead of the weekly repo rate, which is known as the policy rate, and noted that this practice not only reduces the effectiveness of monetary policy but also undermines the principle of transparency. The note also emphasized that the practice “led to insufficient tightening of deposit rates, thus hampering the strengthening of the liraization trend.”
In its MPC assessment note, TEPAV also drew attention to the Central Bank’s funding channel for the banking sector.
The assessment note reminded that even if the policy rate was raised to 40 percent at the November meeting, the Central Bank has been transferring funds to the banking sector in recent months not through repo transactions, but through Turkish lira swap market transactions against foreign currency and said, “In this case, the policy rate is not the announced repo rate, but effectively a lower weighted average swap rate that is unknown to the public. This practice not only adversely affects the effectiveness of monetary policy, but also harms the principle of transparency and hinders the strengthening of the liraization trend by causing deposit rates not to tighten sufficiently.”
In the TEPAV note, it was pointed out that it would be useful to raise the policy rate to 45 percent and the following points were emphasized:
“It would be useful to review the implementation of the Turkish lira swap market transactions against foreign exchange and at least consider shortening the maturity and reducing the amount of the transaction. Moreover, the weighted average interest rate of the liquidity provided to banks should be disclosed to the public. As we are approaching the end of 2023, it seems necessary to announce an official inflation target for each year-end of the 2024-2026 period. This would also be an important communication policy tool to quickly close the CBRT’s credibility gap.”
