What are the Central Bank’s options?
With credit growth rate being substantially above the targeted level, the MPC will continue increasing reserve requirements.
The Central Bank (CB) targets three variables. Out of these, two are released on a monthly basis and one on a weekly basis. Consumer price index (CPI) inflation and real exchange rate figures for February were released this week. Also, credit figures for the week that ended on February 22nd are available. On the 26th, the press release on the summary of the Monetary Policy Committee’s (MPC) February meeting was issued. I would like to assess the recent developments with reference to the press release in order to identify the options ahead of the CB.
Rapid credit growth
Inflation: In February, CPI inflation and headline inflation were 7 percent and 5.4 percent respectively, in harmony with the figures we have been observing since 2009. The CB makes a similar assessment. Paragraph 11 of the press release says: “The Committee has assessed that the expansionary impact of the monetary stimulus provided during the second half of 2012 will be visible in the forthcoming period. In this respect, it is expected that final domestic demand will increase markedly in the first quarter, and the recovery will be reflected in the production more strongly starting from the second quarter.” In the following paragraph, the CB stresses that “low level of capacity utilization rate contains the upside pressures on inflation, notwithstanding the revival in economic activity.” In conclusion, the CB does not deem it necessary to intervene.
Credit developments: using the CB’s calculation method, we see that credit growth rate increased from 15.2 percent in the last quarter of 2012 to 21.8 percent in the first quarter of 2013. The rate is even higher at 23 percent for the previous four weeks. Hence, credit volume has grown above the targeted 15 percent lately. The MPC meeting summary (paragraph 14) says: “Meanwhile, it would be useful to increase reserve requirements in order to bring credit growth to more reasonable levels.” So, with credit growth rate being substantially above the targeted level, the MPC will continue increasing reserve requirements in following meetings.
Limited interest rate cut
Real value of the lira: the CB initially has declared that they will intervene if the real exchange rate index exceeds 120. Related statements implied that the CB will give a moderate response if the index floats between 120 and 125 and a gradually stronger response if the index tends to exceed 125. In January the index had a value of 120.4. The index value for February was 119.7, slightly below the threshold. The February meeting of the MPC assessed (paragraph 14): “The Committee has indicated that cutting the lower bound of the interest rate corridor will limit the appreciation pressures on the Turkish lira and thus contain macro financial risks.”
The CB plans to cut the lower bound of the interest rate corridor if an upwards pressure on the real exchange rate index (the appreciation pressure on the Turkish lira in real terms) appears. The conclusion: given the recent developments in the real exchange rate index, the CB will most probably not change the interest rate corridor until the MPC meeting in March. Unless an appreciation pressure on the Turkish lira unveils, of course. Even it does, it will be a small cut in the lower bound. The February report of the MPC explains why the upper bound of the corridor was cut, but I did not understand their justification. So I am not sure if the CB will or will not change the upper bound of the corridor in March.
This commentary was published in Radikal daily on 07.03.2013
