Question

In: Economics

Discuss why the policy rate of TCMB (turkish central bank), which is the one-week repo rate,...

Discuss why the policy rate of TCMB (turkish central bank), which is the one-week repo rate, may be misleading to measure the true cost of funding that TCMB charges to our commercial banks.

Solutions

Expert Solution

Turkey is a country which saw wild swings in the FX rates in the last two years. Turkey inflation spiked sharply when their currency Turkish Lira slumped its value against US dollar in the middle of 2018. To control the inflation, the central bank increased the country's benchmark interest rate [one-week repo rate] steeply by around 625 basis points in September 2018. This monetary tightening policy was done to bring price stability in the turbulent economic times. Turkey corporate sector heavily depend on the external funding [foreign currency funding] as the domestic interest rates are elevated in the uncertain times. Any sharp depreciation on the Turkish Lira will have negative effect on servicing their foreign currency debts.

When the volatility was brought under control in the subsequent period in the 2019 first half, the rates were once again cut to reflect the real conditions in the inflation in country. Hence the interest rate was used as a tool to control the currency fluctuations in Lira and the forecast inflation conditions than the real inflation in Turkey. Hence the true cost of funding will not be reflected in the benchmark one-week repo rate.


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