Turkish President Recep Tayyip Erdogan on January 17 once more demanded that lenders lower interest rates and lend more to give a lift to his country's flagging economy, warning: "If the financial services industry does not open the credit taps, it will find us against it",
Flying in the face of economic orthodoxy, Erdogan - who is pushing for a referendum that critics say could turn him into a strongman president - is continuing to insist that lowering interest rates would result in lower inflation, as well as stronger economic growth. He has been calling on the lenders to fuel loans since last year when the economy started to show signs of deterioration.
Erdogan’s unorthodox approach and political pressure is constraining the central bank’s policy choices in its struggle with rising inflation and the depreciating Turkish lira.
The central bank has in the past week attempted to address its dilemma with an “implicit” rate hike - or "covert tightening" as some observers describe it - within its interest rate corridor. This involves opting to not hold one-week repo auctions, but instead funding the banking system via overnight lending and the late liquidity window, which come with higher interest rates. However, the move has resulted in higher borrowing costs and lower liquidity for Turkish lenders.
Erdogan held a surprise Economic Coordination Committee meeting on January 16. It came shortly after the central bank launched its new strategy of not holding daily one-week repo auctions. Central Bank Governor Murat Cetinkaya attended the meeting. The survival of the central bank’s hidden rate hike strategy may depend on whether the governor convinced Erdogan of its merits at the meeting. It is noteworthy that Erdogan did not criticise the regulator in his latest comments.
Answering questions about the meeting, Prime Minister Binali Yildirim said on January 17 that if the central bank is in fact independent he should not offer comment on its policy rates. However, Erdogan said on the same day that his responsibility is to defend his nation’s rights despite calls for him to obey the rules of central bank independence.
Erdogan knows he stands relatively alone in his fight against the “interest rate lobby” but he regularly reiterates that he will not step back from defending his country against “global masterminds”.
The central bank again failed to hold a one-week repo auction on January 17, once more choosing to fund the banking system via overnight lending and the late liquidity window. The strategy has been in place since January 12.
The one-week repo rate of 8% is the central bank’s main policy rate, but the overnight lending rate stands at 8.5% and the late liquidity lending rate is currently at 10%.
Since January 16, the central bank has also been limiting the amount of available borrowing to Turkish lenders on the interbank money market and the Borsa Istanbul (BIST) repo markets, which is offered with a rate of 8.5%. This has essentially forced domestic lenders to use the late liquidity funding at the 10% rate.
As a result, the average funding costs of Turkish lenders rose to above 9% on January 17 from 8.73-8.75% on January 16 and 8.39% on January 13, according to Reuters.
On January 17, the central bank announced another move to support liquidity conditions in favour of the lira. The support is to be achieved through FX swaps. The regulator is to establish a new interbank market which will enable the banks to trade their Turkish lira and FX-denominated reserves.
In response to the central bank’s complementary moves to cut lira liquidity and hike funding costs, the Turkish lira gained 0.79% d/d against the USD and was trading at 3.7814 as of 18:50 Istanbul time on January 17, after testing 3.8169 during early trading hours.
The markets are awaiting the results of the central bank’s next rate-setting meeting, scheduled for January 24, as well as Fitch Rating’s next Turkey rating review on January 27.
|Turkish banking industry|
|Loans (TRY mn)||1,635,769||1,704,254||4.19%|
|Deposits (TRY mn)||1,362,981||1,430,836||4.98%|
|Gross NPL / Total Loans||3.46%||3.36%||-0.11|
|Bank Capital to Assets||11.42%||10.89%||-0.53|
|Capital Adequacy Ratio||15.95||15.27||-68.00|
|Assets (TRY mn)||2,581,462||2,702,173||4.68%|
|Gross NPL (TRY mn)||56,626||57,194||1.00%|
|Net profit (TRY mn)||32,070||35,045||9.28%|
|Net Interest Income (TRY mn)||74,533||82,623||10.85%|
|Total Shareholders' Equity (TRY mn)||294,851||294,338||-0.17%|