Market-based monetary policy expectations for Turkey

Özet

This study discusses various types of market-based instruments and tries to find which financial instrumentis the best in predicting monetary policy expectations for different time horizons in Turkey.Consistent with the existing literature on this subject, we adopt an approach that comes from expectationstheory of term structure of interest rates, which implies that short term forward interest ratesreflect market expectations of short term rates in the future. By using this methodology, we treat upcomingmonthly, 3-months, 6-months, 9-months, 12-months, and 24-months average of daily CBRTeffective policy rates as alternative dependent variables; and market rates with corresponding maturitiesas independent variables. We aim to assess which market rate has the best predictive power for CBRTeffective policy rates. We find that FX forward implied rates dominate all other instruments for 3, 6, 9, 12and 24 months horizons while Borsa Istanbul overnight repo rate expectation from CBRT’s Survey ofExpectations is the best for 1-month horizon in forecasting future policy rates. We also note that CBRT’smonetary policy predictability also changes with CBRT’s choice of monetary policy implementation.