Eyes on Central Bank as authorities pledge market stability

ISTANBUL

Top officials from the economic management have committed to ensuring stability and taking further action as necessary in response to the recent volatility in the Turkish financial market, with investors keeping an eye on the Central Bank ahead of its scheduled rate decision on April 17.

The Central Bank met to asses risks and announced a raft of measures to tame the volatility, while the Capital Markets Board (SPK) banned short selling.

In a call with more than 4,500 international investors earlier this week, Finance Minister Mehmet Şimşek assured that authorities have taken and will continue to take necessary steps “for the healthy functioning and efficiency of the markets.”

Şimşek told investors from North America, the United Kingdom, other European countries and the Middle East that the effects of recent developments on the economy should be temporary and limited.

Şimşek reiterated that the economic program, which he says has strengthened the resilience of the Turkish economy, will continue to be implemented with determination.

Central Bank Governor Fatih Karahan delivered a similar message, saying that the bank stands ready to act.

Speaking at an event in Istanbul this week, Karahan said they quickly took the necessary measures to prevent the market volatility from deteriorating the macroeconomic outlook, adding that the bank has a very broad and powerful toolkit to deploy.

“We will determine our steps with a proactive approach to limit the macroeconomic effects of market volatility. There is no deterioration in the fundamental dynamics of our economy,” he said.

The governor stressed that they will continue to use all monetary policy tools decisively within market rules in order to maintain the effective functioning of financial markets.

Amid the volatility in the markets, the bank’s Monetary Policy Committee (MPC) held an interim meeting on March 20, where it increased its overnight lending rate from 44 percent to 46 percent while keeping the policy rate at 42.5 percent.

In addition, the bank suspended one-week repo auctions “for a while.”

The bank also implemented measures to support the Turkish Lira and enhance foreign exchange liquidity in order to limit the volatility in the market.

Karahan reiterated that they will maintain the tight monetary policy stance until a permanent fall in inflation and price stability is achieved.

“In case of a significant and permanent deterioration in inflation, we will tighten our monetary policy stance,” the governor vowed.

In a research note on March 27, Goldman Sachs said it expected the Central Bank to raise its policy rate at the April 17 meeting or before by 350 basis points to show its ability and willingness to implement its disinflation program.

The bank succeeded in stabilizing the exchange rate at a level roughly 3 percent weaker than prior to the shock, but this has come at sizable reserve losses, noted Goldman Sachs.

“While the initial selling pressure was disproportionally driven by foreign demand…these stock adjustments are manageable given the high level of reserves currently,” it added.

Data from the Central Bank showed on March 27 that its gross reserves declined by $8 billion to $163.1 billion in the week ending on March 21.