“Interest rate cuts are intended to deter hot money inflows … the benchmark interest rate now stands at 6.25 percent,” said Neil Shearing of Capital Economics. Hot money refers to funds that come into a market to take advantage of favorable currency exchange rates, a common practice in emerging markets. “This is the rate at which the bank provides seven-day funds to the market. The interest rate paid on deposits at the Central Bank, however, is arguably more important from the perspective of capital inflows and this now stands at just 1.5 percent, compared to an inflation rate of 6.4 percent.”
The recent rise in reserve requirements, coupled with the Central Bank’s interest rate cut last week, will have a net effect of “tightening the policy stance,” Shearing said, echoing previous statements by Central Bank Gov. Durmuş Yılmaz.
“In theory … higher interest rates ration credit by increasing its cost, while higher reserve requirements ration credit by limiting its supply,” Shearing said. “Indeed, in the present environment of globally low interest rates, the latter could well be more effective at controlling lending.”
An example for Brazil
Capital Economics believes that Turkey’s monetary policy could be a model for other emerging markets, notably Brazil. Shearing, however, cautioned that the upcoming general elections in June could harm fiscal policy.
İş Investment’s Bülent Şengönül and Kutluğ Doğanay said in their report that markets are only looking at the negative side of the Central Bank’s decision. Markets tumbled last week after the bank announced interest rate cuts. “We view [the current] policies positively in a structural sense,” the economists said. “The measures will greatly decrease structural risks to the banking system.”
The İş Investment economists predicted that the average maturity for individual deposits will rise to 95 days from the current 45, while also saying that the positive effects of the benchmark interest rate cut have not been priced in yet.
The İş Investment report said the Central Bank has mopped up excess liquidity of 17.7 billion Turkish Liras from the system since December. “This corresponds to 1.8 percent of banking assets and 3.2 percent of total credit,” the report said.
İş Investment predicted that Vakıfbank, Halkbank and Albaraka Türk would be more negatively affected by the raises in reserve requirements due to the high level of lira-deposit positions on their balance sheets.
Source : http://www.hurriyetdailynews.com/n.php?n=some-analysts-lend-support-to-gov.-yilmaz-2011-01-25 - Jan 25, 2011
