Governor on 2014 Monetary Policy: Short Term Gain, Long Term Pain?

TURKEY - In Brief 24 Dec 2013 by Murat Ucer

---

Governor Basci introduced the CBT's 2014 Monetary and Exchange Rate Policy report today. As far as the big picture is concerned, there are no major surprises. The Bank plans to deal with the F/X market pressures in two phases, as fas as we can see it. Phase One: Do not move rates any higher than 7.75%, and deal with the pressures by aggressively selling F/X, instead. Phase Two: Hope that the problem goes away by January/February, thanks to a better inflow picture. In Phase One, the Bank also plans to give some of the gross reserves back to banks by raising ROC (and hence, making parking F/X at the CBT more expensive) and simplifying RRRs (which would apparently release another $1 billion). More importantly, the Bank plans large amounts of net F/X sales, like on the order of $3 billion in the remainder of this year, and another $3 billion in January. This obviously will make a serious dent in net reserves, at a pace that looks simply unaffordable, since the CBT does not print dollars. And since the rates are fixed at 7.75% as well, this means financing reserve drawdown (NFA outflow) through an expansion in Net Domestic Assets or more funding provided to markets through OMOs. And this is where Phase Two comes in: the expectation that hopefully all the bad things will go away, and pressures on the lira will disappear. We are watching, to be frank, with quite a bit of concern, as we listen Ella sing, "Bewitched, Bothered and Bewildered"...