Some Thoughts on Today's CBT Meeting

TURKEY - In Brief 20 Nov 2013 by Murat Ucer

---

I have attended the CBT’s regular monthly meeting with economists today.  The key message is that the Bank is trying to simplify and normalize monetary policy.  First, they seem to have realised that, as far as inflation dynamics go, they have run out of excuses, with core and service inflation both hovering around 7%-8%. Second, they told the audience which interest rate to look at: the interbank money market rate (see graph we used in yesterday’s Brief).  (There were lost of questions on this – what’s your policy rate? What rate should we forecast as the monetary policy rate? – etc.)  They said that this rate will be close to 7.75% from now on (which is what was said yesterday), because that is the cost at which the banks acquire funds, at the margin.  On the other hand, the CBT’s "average" funding rate will be at 6.5%, as they still provide TL10 billion out of some TL40 billion financing at the cheapest 4.5% rate.  It sounded like they may do away with that rate in due course.   They feel they needed to be more predictable because capital flows are weak (they used interest rate volatility as sort of a “sand in the wheels” of excessive inflows).   All in all, I left today’s meeting with a somewhat clearer mind than most meetings. The question is now whether 7.75% will be enough. I asked whether a barely positive market rate in real terms could be enough since Turkey’s neutral real rate is arguably at least 2%-3% (which implies, a’la a back-of-the-envelope Taylor Rule reasoning, a money market or policy rate of over 10%).  The Bank’s Chief Economist Hakan answered by suggesting to look at the Financial Conditions Index, rather than the neutral rate.  I am not convince...