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UPDATE 2-Turkey eyes Cyprus, hunkers down for falling inflows
March 27, 2013 / 8:30 AM / 5 years ago

UPDATE 2-Turkey eyes Cyprus, hunkers down for falling inflows

* Notable deceleration in capital inflows

* Tighter liquidity policy signalled

* Weak global demand, commodity prices contain inflation (Adds analyst comment)

By Nick Tattersall and Nevzat Devranoglu

ISTANBUL, March 27 (Reuters) - Turkey’s central bank signalled a move away from its focus on protecting the economy against hot money on Wednesday, hunkering down instead for the threat of falling capital inflows if the crisis in Cyprus triggers global risk aversion.

The bank said there had been a “notable” deceleration in inflows recently and that this, combined with its tighter liquidity policy, would dampen the credit growth it has spent much of the past two years trying to keep in check.

In a characteristically complex policy move, the bank cut its overnight lending rate by 100 basis points on Tuesday to 7.5 percent but held its borrowing and one-week repo policy rates at 4.5 and 5.5 percent, respectively.

At the same time, it more than halved the maximum amount of liquidity it will provide at its monthly repo auctions, where the interest rate is set by the market, meaning more lira funding will be provided instead through its one-week auctions, where the rate is set by the bank.

This gives it a tighter grip on liquidity conditions, allowing it to control both the amount and cost of banks’ lira funding more quickly, meaning it can react faster either if the global environment deteriorates sharply or if the Cypriot crisis is contained and risk appetite picks up again.

Economists met with the central bank on Wednesday to get a better understanding of the rationale behind Tuesday’s decisions, the latest moves in what has become one of the world’s most complicated monetary policy mixes.

“The monetary policy committee’s decision was surprising and confusing, which presumably reflects the uncertain capital flow outlook,” said Inan Demir, chief economist at Finansbank.

“Should the Cypriot situation deteriorate and lead to a recessionary global environment, the central bank would switch to easing all policy instruments,” he said.

“On the other hand, if adverse scenarios do not come to pass and capital flows reaccelerate, the bank might well continue lowering the floor of the (interest rate) corridor and hiking required reserves to fight lira appreciation and loan growth.”

Cyprus has agreed a 10 billion euro ($13 billion) rescue package with international lenders including potentially heavy losses for bank deposits above 100,000 euros, averting what European leaders said would have been a chaotic national bankruptcy that could have forced it out of the euro.

But there is growing concern that the rescue will provide a template for future euro zone bailouts making private investors foot the bill, sending the euro to a four-month low on Wednesday and suggesting the uncertainty is far from over.


Most economists had expected Turkey’s central bank to leave rates on hold and again raise its reserve requirements on Tuesday, continuing its efforts to control loan growth of close to 20 percent, above its medium-term target of 15 percent.

The bank has been worried that rampant credit growth could stoke inflation and that speculative inflows, attracted by its robust economic growth and hopes for a second sovereign rating upgrade, could leave the lira over-valued.

But the bank signalled that the environment had changed and that it was now more relaxed about credit growth against the backdrop of a more uncertain global economy.

“Credit growth has accelerated in early 2013 due to strong capital inflows. However, there is a notable deceleration in capital inflows recently,” it said in a presentation on its website to explain its latest policy decisions.

“The tighter liquidity policy, together with the recent deceleration in capital inflows should have a dampening effect on credit growth,” it said.

A double-digit rise in exports last year bolstered Turkey’s resistance to the slowdown blighting much of Western Europe, but a collapse in domestic demand reduced overall growth to 2.5-3 percent from 8.5 percent in 2011.

In response, the central bank has been trying to spur growth since mid-2012 and embarked on a campaign of cuts in rates in September. But it is also trying to quell inflation and tame the current account deficit, the country’s main economic weakness.

In its presentation, it said weak global demand and the outlook for commodity prices were containing inflationary pressure, but that it would continue to monitor the impact of growing credit demand on prices.

It said that while the current account deficit was expected to widen in the short term as domestic demand picks up, its policies would limit further deterioration beyond that. (Reporting by Nick Tattersall; Editing by Daren Butler)

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