Question

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

2)      Starting from the beginning of 2018, plot the time series data for weighted average funding cost (ağırlıklı ortalama fonlama maliyeti) of TCMB and discuss why it is a better measure.

3)      What can you say about the relationship between weighted average funding cost and daily exchange rate?

a.       For this purpose, starting from the beginning of 2018, plot the time series for weighted average funding cost and daily exchange rate (value of USD against TL)

Answer 1

Turkey is a country that 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 the 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's corporate sector heavily depends on external funding [foreign currency funding] as the domestic interest rates are elevated in uncertain times. Any sharp depreciation on the Turkish Lira will have a 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 the 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.

Dear student as HOMEWORKLIB Answering Guidelines, I have answered the first question.

Please Post Separate for other Questions.