MNI INTERVIEW: Turkey QT May Only Delay Rate Hikes- Kara

The Central Bank of the Republic of Turkey seems to be deploying quantitative tightening to avoid hiking rates before March local elections, its former chief economist Hakan Kara told MNI, though he added that it may still be forced to raise rates in April or May.

February’s annual inflation was above expectations at 67.07%, figures released earlier this week showed, prompting the CBRT - which held rates at 45% at its last policy meeting - to announce additional tightening measures. (See MNI WATCH: CBRT Holds Rates, Maintains Hawkish Policy Outlook)

Reducing the monthly growth limit for Turkish lira commercial and general loans from 2.5% and 3% respectively to 2% will make the policy stance more restrictive and decrease pressure on the currency, Kara said in a written response to questions. Banks that exceed the 2% monthly loan growth limit will be subject to additional reserve requirements and bond holding requirements.

NO SUBSTITUTE FOR HIKES

However, this “first line of defence” is no substitute for raising rates, Kara added, and may not be enough to anchor inflation expectations. It also runs the risk of reinforcing the view that it is not fully free to use its main policy tool, he said.

“Quantitative tightening looks like the first line of defence. Until the elections, which will take place at the end of March, the Central Bank of Turkey is likely to continue to use similar measures as needed, and hope that this will be sufficient to prevent stress in FX markets.”

Turkey’s exchange rate adjusted credit growth has been around 28% over the past three months in annualised terms, hence the attempt by the central bank to contain further acceleration in loans and limit broad money growth, said Kara, who left the bank in 2019 and is professor of monetary policy and financial markets practice at Bilkent University.

“If these policies do not work to calm the markets and inflation trend exceeds the official predetermined target/forecast path, an interest rate hike may arrive as early as April or May,” he said. (See MNI INTERVIEW: CBRT On Track, But Risks Remain - Ex-Vice Gov)