The monetary policy implemented by the CBRT reduced the cost of borrowing

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Lerato Khumalo

In the analysis titled “Monetary Policy Stance and Treasury Auctions” published in the Central Bank’s blog page of the Central Bank of the Republic of Turkey (CBRT), it was reported that monetary policy can affect public borrowing costs through the shape of the yield curve and the demand for borrowing auctions.

The analysis prepared by General Directorate of Markets Turkish Lira Markets Manager Ali Gencay Özbekler and Assistant Experts Ali İzzeddin Çelebi and Alper Tunga Demir was published on the CBRT’s website.

In the analysis, it was stated that monetary policy can affect public borrowing costs through the shape of the yield curve and the demand for borrowing auctions, and it was noted that in periods when tight monetary policy is implemented, short-term interest rates rise together with the policy rate, while the expectation of a decrease in inflation can reduce long-term interest rates.

Similarly, the analysis reported that the fight against inflation strengthened banks’ risk appetite and risk-bearing capacity for debt instruments by increasing predictability, thus, the elasticity of the demand curve increased in auctions where bonds were re-issued and the interest rate change in the secondary market remained limited.

It was stated that in the analysis, the effect of the tight monetary policy stance on reducing borrowing costs was examined in the context of the re-issue auctions of the Ministry of Treasury and Finance.

“THE DEMAND CURVE SHOWS THE RELATIONSHIP BETWEEN THE AMOUNT AND COST OF BORROWING FORMED IN TREASURY AUCTIONS”

In the analysis stated that the demand curve formed in the treasury borrowing auctions can be calculated by using the price-quantity data realized until the tender cut-off point, it was noted that the demand curve shows the relationship between the amount and cost of borrowing in the treasury auctions.

In the analysis, it was stated that a more horizontal position of the demand curve means an increase in price elasticity, and considering the negative relationship between bond prices and interest rates, it was stated that a more flexible (horizontal) curve reduces the cost of the Treasury for the same amount of borrowing.

In the analysis, it is stated that the monetary policy stance plays a supporting role in shaping the flexibility of the demand curve, and in fact, when the amounts and price values ​​​​in Treasury borrowing auctions are looked at periodically, a more flexible demand curve is formed in the periods when tight monetary policy is implemented. It was noted that it was associated with an increase in carrying capacity.

In the analysis, it was stated that in the environment of tight monetary policy, the far end of the curve shifted upwards and thus the effect of the quantity on the price decreased, and that the flattening of the curve showed that the demand conditions in the auction improved and the Treasury was able to borrow at a lower cost.

“IT IS OBSERVED THAT BORROWING COSTS DECREASED BY 40 BASIS POINTS ON AVERAGE IN TREASURY RE-ISSUANCE AUCTIONS”

It was stated that the results of the analysis point to the positive effect of the tight monetary policy on the primary market, and it was noted that there was a decrease in the cost of borrowing through the increase in flexibility within the framework of the tight monetary policy stance.

Focusing on the CBRT’s last monetary tightening cycle, the analysis stated that borrowing costs in Treasury re-issuance auctions decreased by 40 basis points on average, and it was calculated that this contributed approximately 6.8 billion TL to public finance.

In the analysis, it was reported that tight monetary policy increased the return rates in bond markets through the monetary transmission channel, while supporting demand flexibility in re-issue auctions through the predictability and expectations channel.

In the analysis, “Increasing flexibility with the contribution of predictability and credibility points to an increase in the risk-bearing capacity of banks. Thus, we evaluate that the CBRT supports the financial system with its policy stance and contributes to public finance through Treasury auctions.” expressions were used.