The Central Bank of the Republic of Turkey (CBRT) announced yesterday that it has decided to complete a simplification process for the operational framework of its monetary policy after two years of work. The CBRT set the one-week repo rate to 16.5 percent, setting it as the benchmark and equalizing it with the current main funding rate, late liquidity window. The decision of the CBRT will be applicable as of June 1. While the markets hailed the long-awaited simplification move, the Turkish lira climbed more than 3.3 percent against the U.S. dollar, the highest since November 2015. Following the CBRT's decision, the U.S. dollar retreated to as low as 4.57 against Turkish lira from 4.65 earlier in the day.
The dollar closed trading at 4.70 on Friday, after hitting a record high of 4.93 last week. Moreover, the yield on 10-year securities fell 50 basis points to 14.18 percent, while the Borsa Istanbul 100 Index climbed 2.69 percent and hit 105,976 points at 3:21 p.m. local time. The decision on the monetary policy aims to ensure a more predictable single-rate policy without further deploying multiple instruments and relying on a wide interest rate corridor. The one-week repo, currently standing at 8 percent, was previously the CBRT's main funding tool, however the bank has not been using it in setting the main funding rate since January 2017. The late liquidity lending rate was designed as an emergency funding rate for banks that had mismanaged daily cash needs.
"The Central Bank overnight borrowing and lending rates will be determined at 150 basis points below/above the one-week repo rate," the bank said in its statement.
The overnight lending and borrowing rates will be set at 18 percent and 15 percent, respectively up from 9.25 percent and 7.25 percent, according to the bank.
The late liquidity window rate, which is the current main funding rate, will rise by 300 basis points to 19.5 percent, once the operational shift to the new framework comes to an end on June 7.
CBRT Governor Murat Çetinkaya and Deputy Prime Minister Mehmet Şimşek are scheduled to attend a meeting with investors in London today. Ahead of this meeting, the CBRT's decision was construed as a strong message to investors both at home and abroad as Çetinkaya was reportedly signaled the bank's change of policy at a meeting with local investors in Istanbul on Sunday.
Economy Minister Nihat Zeybekci said that the simplification move by the bank is a very positive step and expressed the government's full support for the CBRT's policy. The decision was also welcomed by experts who saw it as a significant step to restore and reinforce its credibility as well as a move to support TL-denominated assets. Experts emphasized said that the monetary policy change brings more understandable and predictable policy for market players.
The tightening monetary policy of the CBRT is also expected to ensure financial stability in the markets again.
Following CBRT's interest rate hike last week, experts and investors highlighted the urgent necessity of a simplified monetary policy.
The proactive decision of the CBRT was seen as an important indication of the bank's credibility and independence.
"Since the main funding rate will be set on one-week repo, the interest rate corridor might be increased at the Central Bank's scheduled meeting of June 7. The hike of all interest rates, institution of a narrow and symmetrical corridor, and the change in main funding rate shows that the Central Bank is determined to follow an active role in monetary policy and has send a strong message of its independence to investors," Enver Erkan, GCM Forex Research Expert told.
Drawing attention to the positive reaction of the markets and spiking lira, Erkan said the CBRT has established a clarified communication with the markets by abandoning late liquidity window and ensured a predictable monetary policy.
As the current tight monetary policy becomes official, the CBRT has restored confidence of the markets for its independence.
İş Portföy Chief Economist Nilüfer Sezgin highlighted that the decision will create positive impact on TL-denominated assets.
"Considering the recent concerns over the monetary policy, investors are expecting concrete steps instead of long-term plans," Sezgin added.
Although the central bank has been following a single rate for a long time, the framework simplification reduces uncertainties, she said and emphasized more predictable and comprehensible policy of the bank.
Referring to the recent interest rate corridor, she added that the CBRT will have the opportunity to further tighten monetary policy, which is a positive development for the price stability and the Turkish lira.
QNB Finansinvest Chief Economist Burak Kanlı said the CBRT governor clearly gave the signal that the simplification step will be taken at the meeting on Sunday evening.
"When Mr. Çetinkaya gave this signal, I felt awesome and said 'finally' to myself," Kanlı said. "However, it was surprising that the decision was taken so quickly. Finally, we have reached the framework of simplified interest rate, whereby a single funding rate as part of monetary policy will be deployed."
He stressed that with this move, the CBRT not only made the monetary policy more simple and understandable but also took a big step toward restoring the credibility recently lost by showing the market that it can make the most important move toward normalization, suggesting that this decision is undoubtedly positive for the Turkish lira and its assets.
He said they expect the appreciation trend in the Turkish lira to continue. This decision, he emphasized, can also give TL-denominated assets a new impetus. There is no need to expect any interest rate hikes in June.
