Friday, December 17, 2010

TSL MPW: The Sore Loser Monetary Policy Watch

A friend commented on my remark in my last Roubini Global Economics Economonitor contribution, that markets had made fool of central banks all the way from the United States to China: He duly noted that CBT had made a fool of the market including all the big names, or those big only in names, throughout the last two years in Turkey, concluding that such remarks under heavy losses would amount to being a sore loser.

While he is a good friend, he is known not to mince his words, but still, I don't think think he was shooting at me, especially because you are I am the messenger and the implicit rule is that you just don't shoot the messenger... Besides, I am not a big name at all; if anything, I am a no-name (another pointless hyperlink, but God, I miss that place and the Greek philosopher-waiter working there). Anyway, he concludes by noting that we are all fallible, and better to act as such, and I have been quite at ease with admitting to being made a fool by the Central Bank of Turkey several times...

Nor do I think that he was aiming at Atilla Yesilada, from whom I was quoting... I think his arrows were rather pointing at the overconfident, dark-suited dudes seemingly spending a lot of dough on styling gel, who happen to crowd the country's main business channels (yep, I am jealous, it is the cat and the liver deal- I only appeared in Atilla's program at CemTv once, although I would prefer his program any day, unless getting laid with the anchor-chicks is included in the others; maybe I should just call up and ask about that to one of the slick-hair dudes). 

But his comments gave me the idea for the title of my just-inaugurated Monetary Policy Watch: The Sore Loser Central Bank of Turkey Monetary Policy Watch, or TSL MPW... If anything, it should indeed be a reminder that we are all indeed fallible, especially against a Central Bank that has huge advantages against tactless market economists like me commenting on its policies, both in terms of available data and human capital (research power)...

And without further chit-chat, allow me to directly jump in:

As I noted yesterday, there wasn't much of a surprise in yesterday's rate decision, with the policy rate cut 50 basis points, as expected. The Bank also widened the band between its overnight borrowing and lending rates, making more room for the market rates to wonder around. The move is also geared towards the Bank's long-term goal of smoothing financial intermediation by encouraging banks to deal with each other rather than with each other.

And this morning came the expected reserve requirement hike, and it is, again as expected, maturity-dependent: Before, it was a flat-out 6 percent for all maturities. Now, it  is 8 percent for deposits with maturities up to one month, 7 percent for deposits with maturities of three to six months, 6 percent for deposits with maturities of six to twelve months and 5 percent for longer-maturity deposits. With nearly one half of deposits at a maturity of less than there months (and almost all less than six months), a static weighted average calculation, without considering the maturity implications of the hikes, means the the effective required reserve hike is about 1.5 percent. The Bank is also closing loopholes in the balance sheet by making retail repos liable to reserve requirements as well.

One interesting implication of these reserve hikes will be on base money: While the measures are expected to decrease liquidity about 7.6 billion liras & 200 million dollars, without a decline on Bank's liquidity injections, base money will go up (this is not economic theory, just balance sheet accounting). Why is this a problem? With so much money around, the reserve hikes are likely to be passed on to deposit rather than loan rates, which would beat the purpose of the hikes. Note that if it chose to, the CBT could very easily cut liquidity to prevent base money growth, especially since the banks will be much more dependent on the Central Bank's one-week repo funding from now on. But doing so, as I noted in the last Roubini piece, would create upward pressures on interest rates. The same old dilemma reemerging....

Finally, one important lesson of the previous week was to never ignore Central Bank presentations, especially those by Erdem Basci. So I immediately had a look at his Wednesday presentation at the ECB High-Level Policy Workshop on Macroprudential Policy when it was posted on the Bank's web site this morning. It is in English, so feel free to have a look, but let me go over what I deem important:
  • Slide 9: Using the wedge between the Bank's overnight lending and borrowing rates, i.e. the corridor, has been mentioned as early as the Bank's exit strategy report.
  • Slides 13-16: Nice summary of the Bank's policy tools.
  • Slide 21 Communications: I would still argue such important strategy change does not belong in Inflation and Financial Stability reports. It is also interesting, but not the least surprising that Mr. Basci's last-minute presentation at the Turkish Economy Association is not listed: I would not call that effective communication at all.
P.S. The presentation has mysteriously disappeared from the Central Bank's main web site. It is still accessible when you click on it, but for some reason, it is not where new stuff is placed. I became suspicious and went over the presentation again, and surely, there is nothing that should be kept from the public eye at all. I have no idea what's going on, but this definitely is not good communication:)...

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