The first Monetary Policy Committee (MPC) meeting of the year will be held on Tuesday, January 24. The fact that exactly a week later the first Inflation Report of the year will be issued, makes this meeting all the more significant: the brief statement to follow the meeting will provide initial clues as to the type of monetary policy to be pursued by the Bank within 2012.
Investors will recall that in the waning days of last year, faced with the TRL hitting a low of 2.20 against the currency basket and year-end inflation set to reach double-digit levels, the CBT implemented a mode of tightening it termed “additional monetary tightening”. This was implemented mainly via open market operations, and the liquidity funded to the market at the policy rate was reduced temporarily below the lower bound announced for “normal” days, and was even halted for several days. Moreover, unsterilised foreign exchange sales and interventions were used as a complementary instrument. The CBT also defined the main characteristic of additional monetary tightening as follows: “It is intended to be temporary and the duration of the implementation may vary depending on the speed at which the main factors affecting inflation outlook turn favourable." Indeed, with the TRL -- a factor of paramount significance for inflation -- having started to appreciate visibly since then, the CBT loosened its grip by injecting liquidity at the policy rate after an 8-day pause. During the course of this implementation, the blended cost of funding shot up some days to 12%, resulting in an average of 10.5%. The average of the 1-month period preceding this tightening, on the other hand, was a tad below 8%. Recently, the cost of funding has reverted to the interest rate range envisaged for “normal” days by the Bank (“During the course of this period, O/N rates in the interbank will be aimed to remain within a band of 8-12%, and the weighted average of banks’ funding from the CBT at 5.75-8.50%.”)
Consequently, given the comparative success of the additional tightening, markets will try to gauge first and foremost the following from the CBT’s statement: for how long the Bank will continue to effectively utilise the interest rate corridor policy, which has allowed it substantial flexibility in monetary policy manoeuvres. While we stated earlier that we deemed this strategy creative and effective, we nevertheless recognize that the flexibility it provided to the Bank on the flip side meant uncertainty for market players. Given frequent changes in the rules of the game, the direction and amount of change in the cost of funding from today until tomorrow are far from predictable. This, in turn, continues to lead to an elevated risk premium associated with the policy implementation in all types of pricing. We have observed that the Bank, aware of this inconvenience, has started to share information with the market as to its potential responses -- such as the lower limit applied to funding at the policy rate -- in a bid to enhance predictability. However, sudden shifts in monetary policy driven by frequent changes in market conditions have prevented this constructive approach from being appreciated by market players, leading it to be perceived more as a policy swing. As far as communication policy is concerned, we hope that the CBT has drawn the necessary lesson from this phase.
In the first Inflation Report of 2012, we reckon the CBT will most likely reiterate its claim that the year-end target will be attained, predicating its argument on the tightening implemented in the final quarter of last year and the recent additional tightening. In this case, it seems rather likely that the monetary authority will refrain from pronouncing a probable interest rate path or the direction of the monetary policy (tightening/loosening) in its base scenario for the rest of the year. These will likely be provided in the framework of alternative scenarios, based on different eventualities in terms of global risk factors.
As such, the Bank will probably be inclined to maintain the interest rate corridor policy so long as market conditions permit. Furthermore, as interest rate decisions have to be made at the MPC, it will likely have to provide its guidance as to the ranges within which it targets funding costs to fluctuate. Based on our calculations, since October 20, the date of inception of the corridor policy, the average cost of funding is around 7.75%, while the Bank has opted to keep the cost of funding at 7.50%-8.00% excluding “exceptional” days. It is also worth underlining that during the investor meetings held in Ankara, the Bank expressed its view that 12% was an excessive rate in terms of economic balances (Brazil’s 11% policy rate is the highest on a global scale, followed by India with 8.5%), while noting that it deemed reasonable the 5.75 - 8.50% range it foresaw for December. (*)
As we have mentioned before, we see this experiment as a test drive to determine the equilibrium interest rate at which money demand is equal to money supply. We still think that as long as the average cost of funding of CBT facilities (1-week repo, primary dealers facility and O/N Lending) remains significantly above the policy rate, the odds for the policy rate (5.75%) getting closer to the CBT’s blended rate would be higher. This implies scope, when needed, for policy rate hikes to the tune of 200bp, which are likely to be front-loaded under these circumstances. However, the CBT still seems content with this policy and is unlikely to change its stance in the near future.
On the other hand, a rise in the cost of funding and the general interest rate above current levels does not seem justifiable at this stage, given i) the retracement in trend consumer loan growth towards 10% at the end of last year is sustained in the initial weeks of 2012 as well; ii) the 5% appreciation of the TRL; and iii) signs of a strengthening in rebalancing of domestic and external demand. Moreover, potential surprises in the short term in industrial production and inflation might reinforce this perception. Based on our preliminary estimates, a slight negative (first signal being a 7% contraction in automotive manufacturing in December) or a minor positive annual industrial production growth figure seems of significant likelihood. As for inflation, the easing in core inflation on an annual basis -- for the first time since November 2010 -- might be solidified by a stronger TRL, though this may not be the case for headline inflation, which looks set to remain elevated in the early months of the year due to the base effect.
In conclusion, at the upcoming first MPC meeting of the year, the CBT is likely to convey its view that the prevailing tightness level is adequate. The monetary authority is also likely to indicate that it will continue to respond to potential shocks with the interest rate corridor policy. In the coming period, the degree to which the cost of funding will undershoot the average (8%) of the monetary tightening phase, will hinge on the extent of TRL appreciation. A firming of the TRL in tandem with an increase in global risk appetite would strengthen the CBT’s hand in its bid to reduce the funding cost. In the event of stronger-than-expected capital flows, the CBT may also mull halting the FX sale auctions. In the opposite case, on the other hand, the cost of funding level would largely hinge on signals from loan growth, economic activity, and inflation.
(*) The CBT pursues different strategies in “normal” and “exceptional” days.
- In “normal” days, the CBT will continue to hold regular 1-week repo auctions at 5.75%, at an amount of TRL3bn-7bn, and the blended CBT funding cost (as a result of 1-week repo (5.75%)), O/N lending rate to PD (12%) and 1-month repo (yield to be determined through competitive bidding) will be sustained within an interval of 5.75-8.50%. Moreover, the CBT will sell US$50mn via daily FX sale auctions.
- In “exceptional” days, the CBT will discontinue regular 1-week repo auctions at 5.75%. Instead, it will hold intraday 1-week repo auctions through competitive bidding; i.e. the yield will be determined at the auction. Moreover, the sale amount will be higher than US$50mn at the daily FX sale auction, and the CBT might intervene directly in the FX market.
Hiç yorum yok:
Yorum Gönder