We expect the CBRT to cut the policy rate to 9.25% by going to a 50 basis point interest rate cut. The speed of the easing steps of the Central Bank, which has not disrupted the interest rate cut ritual in the last 7 meetings, is decreasing as the policy rate has already decreased to 9.75%. However, factors such as the stagnation effect in the economy and global central banks taking monetary easing measures to alleviate the effects of Covid-19, support the Central Bank's easing policy. On the other hand, Central Bank policies, which are focused on financial stability and growth, may also pose a risk in terms of the value of TRY and price stability. In an environment where the depreciation in TRY has become prominent in the last period, the easing policies may affect external financing costs due to exchange rate. At the same time, it may increase inflation pressures, which are limited due to the weak demand component, through exchange volatility. In theory, the destination point of monetary easing is approached.
The decision of the asset ratio made by the BRSA over the weekend is aimed at ensuring that private banks give more loans. According to this decision, the banks will either distribute the deposits they collected as loans, either take government bonds or swap with the Central Bank. If we look at the formula;
The rate expressed here as asset ratio should not fall below 100% for deposit banks. The most direct way to achieve ratio is through giving loans. The other ways are; purchasing government debt securities or corporate bonds and swap transactions made with CBRT. Corporate bonds or government bonds / T-bills / Eurobonds are subject to purchase in securities. That will contribute to funding of Treasury. As well as, the FX swap transactions held with CBRT (USD-TRY swap) will contirbute to official reserves.
Since the loans are multiplied by 1, securities by 0.75 and the CBRT swap by 0.5, in the numerator section; the easiest way to achieve the 1 result in the equation is to give loans. On the other hand, we know that banks do not give out all of the loans from deposits, and that they convert the syndication loans they provide from abroad with cheaper costs, to loans with higher rates in the domestic market. With the new regulation, banks will have to give more loans to avoid being punished. Loosening of credit conditions may also increase the risk for non-performing loans.
In the denominator section; TRY deposit is multiplied by 1 and FX deposit by 1.25. This means that the more FX deposits, the greater the denominator; so it will be more difficult ito achieve 100% asset ratio. This is for banks to weigh their deposits in TRY. Of course, since TRY deposits and FX deposits are preferred by depositors, banks can be expected to take measures to make FX deposits less attractive.
Another issue, CBRT Governor Mr. Uysal’s statement at the weekend. about FX swap with major central banks. The swap agreement with a bank such as the Fed or ECB is positive for us in terms of short-term foreign exchange liquidity needs. Suppose we will make a swap agreement with the Fed, but the USD swap is hard in terms of the convertibility of TRY. Also, Turkey has low amount of US Treasury bonds in the reserves, so gold reserves remain as an option. The weekly data of April 10 shows that official gold reserves are at 32 billion 872 million USD.
However, the fragility specific to TRY, the fact that the CDS score is above 600 and the high global demand for USD are still effective in the upward movement of the exchange rate.
Source: Tera Menkul
Hibya News Agency