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MPC decisions in April meeting
The Monetary Policy Committee of the Central Bank (MPC-CB) held its April meeting yesterday. The MPC decided to cut the policy rate and the interest rate corridor by 0.5 points. Also, it increased the reserve option coefficient, ROC, which determines the share of lira required reserves that banks are allowed to keep in FX.
The highlight of the week before the MPC meeting was the easing of tensions concerning Southern Cyprus. After the Cyprus banking crisis, international risk appetite decreased in March, which lowered capital inflows to Turkey. But the mood of the markets settled as Cyprus accepted to implement harsh austerity measures and accessed to foreign funds to put the economy back on its feet. Accordingly, international capital inflows to Turkey increased considerably. Another development that might boost fund inflows towards Turkey and similar economies in the future was that the Bank of Japan announced a large quantitative easing. The latest positive assessment of Moody’s on Turkey is also worth noting.
Therefore, the risks that were emphasized as the underlying reason for the decisions taken in the in the previous MPC meeting in March were eliminated. Summary of the March meeting said, “Following the heightened global uncertainty, capital inflows have decelerated in the recent period.” We should expect capital inflows accelerate unless adverse developments alike that in Cyprus take place. Inflows will mainly be short term. On the other hand, it is noteworthy that uncertainties are still immense, chief among these being the political milieu in Italy.
From this perspective, external conditions are now more favorable than they were before the MPC meeting in March. Risk appetite is fostering net capital inflow towards Turkey and peer economies. Yet, uncertainties are still prevailing. Also, the variables that guide the MPC decisions maintained the recent trend:
Inflationary outlook is not in tandem with the target. But it is important to note that the price of crude oil is decreasing towards $100, which is significantly below the average the CB takes as reference when making inflation estimations, currently at $108. In addition, annual CPI is expected to decrease in April due to a technical reason: CPI was quite high in April 2012 and the figure will be excluded off the calculation this year.
Average credit growth rate, with the CB’s method, was 21.7 percent in the first quarter and 21.9 percent in the last four weeks. Credit growth rate is thus stable above the 15 percent threshold. Real effective exchange rate is 120, right on the reported threshold for intervention.
In the first half of the month, lira appreciated nominally against the EUR/USD basket. Given the high inflation differential between Turkey and countries included in the calculation, real effective exchange rate probably exceeded 120 in April. Besides, there are mixed signals concerning the start of a moderate recovery in the first quarter, though those indicating recovery seem to be stronger.
In the light of these developments, the MPC decisions were no surprise. I was of the opinion that reducing policy interest rate was possible, but impeded by the current inflationary outlook. I therefore considered it the least-likely policy option. Other decisions are totally in line with expectations.
This commentary was published in Dünya daily on 17.04.2013