MNI INTERVIEW: CBRT Should Signal Willingness To Cut - Ex-DG

Asian buyers are already cancelling export orders of Turkish goods as a result of the conflict in the Persian Gulf, a former deputy governor of the Central Bank of the Republic of Turkey told MNI, adding that the CBRT should signal willingness to ease policy once the immediate fallout from the crisis fades.

While higher energy prices will add around 2.5 percentage points to inflation this year, so long as disruption remains limited and temporary, the appropriate response from the CBRT could be to ease, not tighten, once the first round of shocks have passed, Ibrahim Turhan said in an interview, pointing to a likely hit to consumption, investment, and capital flows and adding that there are already signs Turkish exports are being affected.

The CBRT is likely to keep rates on hold at its meeting this week, he added, though he suggested that they make clear that they regard the oil price jump as a supply-side impact, and that the best use of monetary policy might be to support the economy. (See MNI EM CBRT WATCH: Hold Expected On Oil, Geopolitical Uncertainty)

“I think they are going to hold. But if I had been sitting at the table, I would try to use the communication tool in a very strong and effective way, because this is a textbook definition of a supply side shock. We know, for example, that almost all shipments orders from Turkey are cancelled by the suppliers in China, Korea, Japan, etc., because of the high levels of uncertainty. They just stopped everything.”

SUPPLY SHOCK

Even if oil price volatility and supply shortages arising from the U.S.-Israeli attack on Iran recede in a month or so, the adverse impact of the supply side shock to Turkey’s economy would last for a further two to four months, said Turhan, now founder and chair of Istanbul's Quanta financial consultancy.

“Even if the central banks don't move, both equity and debt markets will be tightened. This will have an additional tightening effect on financial conditions.”

Inflation is now likely to end the year at 25%, according to Turhan.

“This means average inflation until the end of the year is around 27 to 28%, so there is no need to keep the interest rate at 40%, especially in a supply-side shock environment. The central bank could continue the easing cycle and take the interest policy rate to at least 28-30% by the end of the year,” he said.

“This cannot be done at once, so it would be sensible to convey this message, enlighten the market, and continue this easing cycle. At the same time, it would be fair to assume that the interim [inflation] target of 16% is no longer relevant.”

Oil prices could also fall “drastically” once the situation has normalised - likely by August, Turhan said - with potential downside effects on global investor sentiment. 

“Because of the inability to deliver oil, stocks for producers are currently at their peak, and because of the high uncertainty consumers also are rushing to increase their stockpiles for precautionary reasons.”

REPOS SUSPENDED

The CBRT suspended one-week repo auctions in the immediate aftermath of the attack on Iran, which effectively hiked the funding rate from 37% to 40% by forcing banks to borrow at overnight rates. (See MNI EM INTERVIEW: Chances Of CBRT Rate Hold Growing - Demiralp)

“It was a wise move to tighten the monetary policy stance in the least costly way possible, through this very flexible and temporary method. And I’m pretty sure that as soon as the situation improves - probably not on Thursday, but certainly before the April meeting - it will be removed,” Turhan said.

Should restrictions not be lifted, rates in the secondary market and money market will converge towards the policy rate as the central bank reduces sterilisation of excess liquidity through longer-term repos or liquidity notes, Turhan said.

"Even if one-week repos remain suspended, it basically equates to 200-250 basis points of easing."