Turkey has been cautioned by Fitch that the Central Bank of the Republic of Turkey's delay in simplifying the 3-rate corridor to only one policy rate gives a negative picture. According to the rating agency, the development proves several pessimists right and impacts the credibility of the policy. Fitch blames the central bank for inconsistent communication regarding the policy rationalisation's timeline. The rating agency's criticism came after CBT Governor Erdem Basci stated recently that instability in global markets compels the central bank to defer the dismantling of its wide rate corridor. Basci is implying that the rate corridor plays an important role in driving out temporary pressure on the Turkish lira.

The corridor permits the central bank to increase the effective funding cost for banks without changing the policy rate. The central bank does this by giving less liquidity via its cheaper repo facility and compelling banks to borrow additional from the costlier overnight lending facility. The CBT can this maintain a higher interest rate to protect the lira while the headline policy rate continues to be 7.5%.

Meanwhile, the higher policy interest rate will be politically bad as the Turkish government intends to implement the growth push. The best suitable time to change will be when the Turkish lira does not need any particular protection and will be steady at c.7.5% interest rate. However this scenario is not expected to happen in the near future because of the country's recent inflation performance.

"This policy dilemma -- the need to balance growth and exchange rate objectives -- is the main reason we predict USD-TRY to keep drifting higher this year too, reaching 3.25 by year-end. We do not find the rate corridor concept difficult to understand or creating market confusion; and it does help lira stability -- hence, we would disagree with Fitch if transparency had been their main concern", says Commerzbank in a research note.