The second Monetary Policy Committee (MPC) meeting of 2012 will be held on Tuesday, February 21. We and consensus expect no change in policy rates or in other monetary tools. However, given strong portfolio inflows in January and significant easing in financing conditions, the CBT may let the banks keep a greater portion of TRL RR liabilities in FX, in order to accumulate FX reserves, in line with their guidance at the latest investor meeting in Ankara. Currently the upper limit is 40%, but according to the CBT, the banks are utilising 35% of this facility for the time being.
The CBT may also retain the key message in its statement; i.e. “tight monetary policy stance should be maintained for a while in order to keep inflation outlook consistent with the medium term targets”. Moreover, the monetary authority could underscore once again the merits of preserving the flexibility of monetary policy, through referring to adjustment of TRL funding via one-week repo auctions in either direction, depending on developments in credit, domestic demand, and inflation expectations. Furthermore, we know from the last Inflation Report that CPI forecast of 6.5% is based on the assumptions that tight monetary policy stance will be sustained for a while; annualised loan growth rate will hover at around 15%; and the Turkish lira will display a mild appreciation trend.
However, the CBT may also start building the foundations of an alternative scenario of “strong inflows”, implying a strengthening in capital inflows to Turkey after the January FOMC decision, ECB’s LTRO, and new additions to QE by BoJ and BoE, though this may not necessarily be mentioned in the brief statement to be published after the MPC meeting. If this does turn out to be the case, however, it would be the exact opposite of the market conditions (outflows/weak inflows) that prevailed within October-December 2011. Note that the CBT has shared its possible monetary and macroprudential reactions for both cases in previous presentations.
Therefore, we expect the CBT’s responses to strong capital inflows to be in the form of 1) FX purchase auctions; 2) reducing the lower bound of the interest rate corridor to gain flexibility to ease monetary policy; 3) RRR hikes or at least a stable RRR level. H
owever, we think the CBT will not be in a hurry to switch to the aforementioned alternative scenario, since it seems content with some further appreciation of the TRL and would probably like to be sure about the permanency of capital inflows. Moreover, the pace of loan growth will be of utmost significance concerning this decision. The CBT has been indicating that annualised loan growth rate (FX-adjusted) at around 15% is reasonable for the inflation target. Therefore, the CBT will continue to observe whether the recent trend is in line with the explicit target and react accordingly.
When we look at the recent loan figures, interestingly we see divergent trends in consumer loans and total loans. According to weekly loan data from the BRSA, FX-adjusted (fixed rate, fixed parity) yoy growth is similar to the previous year-end (23-24%) and trend-growth (annualised 13-week average) of FX-adjusted loans still remains in the range of (10-12%) as of February 3. However, the trend indicator for consumer loans that the CBT is following (annualised four-week moving averages) stands at 2%, significantly below the related figures for 2011 and for the average of the 2006-2010 period. We attach greater significance to the trend in total loans, and low consumer loan growth does not seem disconcerting to us, since it is supportive for re-balancing of domestic and external demand. Therefore, we think the recent trend is in line with the explicit target. This implies an unchanged monetary stance and funding cost for the time being.
However, three scenarios are possible for the near future: 1) If loan growth remains roughly around 15% -- as it has recently -- the CBT will maintain the funding cost at its recent level (7.5%), but seriously consider launching FX purchase auctions in case of appreciation pressure on the TRL due to capital inflows. 2) If loan growth dips clearly below 15%, the CBT might adjust the parameters (lower and upper limits for the amount of 1-week and 1-month repo) of the interest rate corridor to ease the funding cost to below 7.5%. 3) Conversely, if loan growth climbs significantly above 15%, the CBT will maintain higher funding costs and even consider higher RRR.
As we review the economic outlook that sets a backdrop to the expected developments in monetary policy discussed above, the most crucial piece of fresh news seems to be the estimate-topping industrial production (IP) reading as of Dec’11. We expect the comparative heftiness of the YE11 IP level -- hence the level at which it starts the new year -- to induce upward revisions to 2012 growth estimates. Investors will recall that industrial production rose by 3.7% yoy in Dec’11, exceeding market consensus of 2.3%. More importantly, seasonally-adjusted (SA) IP jumped to a record-high 131.5 in Dec’11, 8% above the pre-crisis peak in 2008. Since the original series of the IP tend to be more volatile and sometimes misleading, we opt to use IP (SA) figures to construct different scenarios for economic activity. Although there are differences between the two series in mom comparisons, the results should be the same in yoy comparisons. Therefore, barring a permanent break in IP (SA) series, the current stronger path suggests enduring growth in IP, the most important leading indicator of GDP. That is why we flagged a probable revision to our GDP growth forecast towards 3.5-4% from 2.5%, immediately after the data announcement.
Consequently, we revised our 2012 GDP forecast to 4.0%, as part of our base scenario envisaging around 2.5% sequential contraction in IP (SA) for 1Q12, to be followed by c.3.5% recovery until the year-end.
We also present here our two alternative scenarios, in order to show what could lead us to make new revisions. 1) Bad case: Around 4.5% sequential contraction in IP (SA) in 1Q12, to be followed by around 2.8% recovery until the year-end – consistent with around 2.5% yoy GDP growth in 2012; 2) Good case: Around 2.5% sequential contraction in IP (SA) in 1Q12, to be followed by around 6% recovery until the year-end – consistent with around 5% yoy GDP growth in 2012. We also need to underline the fact that upward revisions to Eurozone growth in particular or global growth -- as has already been the case recently by some global investment banks -- would be supportive of our above-consensus GDP forecast -- and even our good case scenario.
Accordingly, we have tweaked our other macro forecasts in line with changes in our GDP forecasts. Additionally, it is worth underscoring that recent data point to growth that is driven more by investment and external demand than consumption demand. For example, while 4Q11 import quantity index contracted by 1.8% with respect to the same quarter a year ago, export quantity index expanded by 5.8%. Leading export readings (Turkish Exporters’ Assembly (TIM)) as of the early months of the year and leading indicators of consumption (automotive sales and CNBC-e consumption index) also seem to suggest a continuation of this trend. While we consider this new composition to be healthier and more constructive for the sustainability of growth, we also believe it should help accelerate a balancing of internal and external demand.
In conclusion, the CBT is once again likely to indicate that a tighter monetary stance remains warranted for some time and it will continue to respond to potential shocks with the interest rate corridor policy. Additionally, the monetary authority may emphasize that in the event that it becomes more confident of the sustainability of strong capital inflows, which have been evident as of the start of the year, it might initiate steps to enable FX reserve accumulation, such as scaling up of the permissible amount of TRL RR kept in FX, and launching FX purchase auctions. As for the direction of the funding cost that has long been hovering at around 7.5%: it will continue to hinge primarily on loan growth, and to a lesser degree on signals from economic activity and inflation.
17 Şubat 2012 Cuma
20 Ocak 2012 Cuma
“Let's Do The Things We Normally Do”
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.
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.
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