Thursday, March 31, 2011

Seeing the CBT's dilemmas in action

This past few days has been great for seeing the dilemmas of CBT's unconventional policies in action:

First, as you probably have heard me say it before, the CBT has to provide enough liquidity to the markets if it doesn't want market rates to be above the policy rate. What this means in practice is that when the Bank pulls liquidity via reserve requirement ratio hikes, it must increase its liquidity support through auctions by more or less the same amount.

I was meaning to show this for a long while, but BarCap has beaten me to it, so I'll just use theirs:
In other words, what the Bank taketh away, it giveth:)- BarCap uses a similar title for the article where this picture is, BTW, so they beat me to the title as well:)

But what happens if the Bank doesn't provide enough liquidity: Market rates go above the policy rate, as I mentioned above:
Total repo funding from the Central Bank had declined from TRY 30bn in March 21 to TRY 23bn in March 28th. And there goes the market overnight rate. The Bank increased it liquidity lines by TRY 2bn on Tuesday and Wednesday, and the market rates eased slightly, although they are still well the policy, i.e. the Bank's one-week repo, rate.

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