Economist Sengul: Central Bank rate hike more damaging than useful
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In its off-calendar meeting held yesterday, the CBRT assessed the risks that developments in financial markets could pose to the inflation outlook and increased the overnight lending rate, which is the upper band of the interest rate corridor, to 46.0%, but kept the weekly repo rate at 42.5% and the overnight borrowing rate at 41.0%.
While the decision was only a signal due to the upper band not being actively used, the CBRT canceled the weekly repo auctions where all funding was provided and made the upper band of the corridor the main funding tool. Thus, banks whose access to TL funding from weekly repo was closed were directed to O/N window, with the weighted average funding cost (WAC) of banks raised to 46% without changing the policy rate.
As will be recalled, before the simplification steps in monetary policy were taken in 2016, the CBRT chose flexibility in the trade-off between flexibility and predictability in monetary policy while managing the market turbulence after the 2008 Lehman crisis and tried to steer monetary policy with a wide range of interest rates, a method whose effectiveness is quite questionable.
[embed]https://www.youtube.com/watch?v=8qnXs2jOFCo&t=52s[/embed]
At that time, we argued that predictability should not be abandoned, new uncertainties should not be added to those already experienced in the markets, concluding the pursuant simplification steps as a correction of a mistake. Today, with the increase in uncertainty, the CBRT seems to have preferred flexibility to predictability, once again. If volatility calms down quickly, the step it took may be considered temporary and additional steps may not be needed.
However, our past experiences show that the time lost during these periods may necessitate larger interest rate hikes in the future. Moreover, the amount of reserves required to suppress exchange rate volatility may increase to undesirable dimensions. In such a situation, the steps taken to eliminate inflationary effects are not sufficient to establish either price stability or financial stability.
However, our past experiences show that the time lost during these periods may necessitate larger interest rate hikes in the future. Moreover, the amount of reserves required to suppress exchange rate volatility may increase to undesirable dimensions. In such a situation, the steps taken to eliminate inflationary effects are not sufficient to establish either price stability or financial stability.
