Bank of America expects Turkey's central bank to leave its effective funding rate unchanged at 40% when it convenes on April 22, but the U.S. bank sees a persuasive case for raising the one-week repo rate to that same level from its present 37%.
According to Bank of America, the Central Bank of the Republic of Turkey should resume funding through one-week repo auctions. Bringing the official policy rate into line with the effective funding rate would, the bank says, help reinforce the central bank's credibility amid what it describes as near-term inflation and balance of payments risks.
The bank argues that adjusting the one-week repo rate up to 40% would preserve policy space for disinflation and for gradual easing at a later stage. In addition, Bank of America says the alignment would simplify the mechanics of monetary policy implementation.
Another practical consequence highlighted by the bank is a reduction in the burden of sterilization operations should the repo rate be raised. Bank of America notes the Turkish banking system has moved back into a liquidity surplus position, a condition that factors into its assessment of the benefits of rate alignment.
The central bank's meeting on April 22 takes place against a backdrop the bank characterizes as continued inflation pressures and ongoing external financing challenges for Turkey. Bank of America frames its recommendation as a way to better synchronize policy signals and operational funding conditions in that environment.
Implications and context
Bank of America's proposal focuses on technical alignment between the policy instrument and the effective funding rate, with the stated aims of strengthening credibility, easing policy execution and reducing the need for offsetting liquidity operations. The bank emphasizes that these outcomes are relevant given the current liquidity surplus in the banking system and the macroeconomic pressures cited.