Monetary Policy: Making a Normal Day Tighter

TURKEY - In Brief 17 Dec 2013 by Murat Ucer

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Today's MPC decision brought no surprises on the "three policy rates" -- the so-called two stable rates (repo rate of 4.5% and primary dealer rate of 6.75%) as well as the marginal funding rate (of 7.75%) -- they all remained unchanged. But by reducing the amount of liquidity provided at the "cheap" rates -- i.e. as we understand it, TL10 billion provided at 4.5% will now be TL6 billion and the amount of funding for primary dealers provided at 6.75%, which is now TL23.5 billion, will be down to TL6.5 billion -- the Bank moved the marginal funding rate in a 'normal day' closer to 7.75% and its effective funding rate on the full OMO stock, to around 7%. This sounds complicated, but the bottom line is that, exceptional and normal days have now converged to the marginal funding rate (of 7.75%), thereby eliminating an unnecessary complication for markets as well as an operational headache (in our view) for the monetary policy operations department of the CBT. Given that the interbank market rates were already at 7.75% in the past several days, this does not mean much in the way of additional tightening, but rather a step to ease up the operational headaches associated with pushing the marginal rate to 7.75% on normal days. Meanwhile, the Bank's narrative on the economic outlook appears broadly unchanged.