This is completely out of control.
That’s what we said on Monday about a Turkish lira that’s more “beleaguered” than Jeff Sessions after a Donald Trump Twitter tantrum.
As regular readers know, the problem here is two-fold (well, actually it’s about twenty-fold, but it can be boiled down to two issues):
- inflation is the highest since 2008 and core inflation is the highest since 2004 but Erdogan the rates strategist is sticking with his unorthodox approach to monetary policy where “unorthodox” means this: tighter policy stokes inflation and if you disagree with me I’ll put you in jail and possibly kill you
- deteriorating relations with the West in the face of a long-simmering dispute with the EU and the distinct possibility that Erdogan is going to end up implicated in both the Zarrab case and a plot involving Michael Flynn to kidnap Fethullah Gulen
The first point there puts the CBRT in an impossible bind. If you do what you damn well know needs to be done to combat inflation, you might wind up in jail (literally) because remember, Erdogan is the self-declared “enemy of interest rates.” If you stand by and do nothing, the lira continues to plunge and bonds sell off in a horrible spiral.
They’re trying an NDF scheme and that hasn’t worked, so on Tuesday the CBRT decided to simply compel lenders to use the late-liquidity window effectively raising their cost of funds by 25bps.
That didn’t exactly stop the bleeding as much as it did keep things from going completely off the rails after the lira hit an all time low against the dollar:
To be sure, no one is impressed with this. “As the non- deliverable forward auctions, which started yesterday, were not enough to contain the depreciation in the currency, the CBRT tightened liquidity,” Erkin Isik, a strategist at Turk Ekonomi Bankasi AS said Tuesday, adding that “the initial reaction from the market is limited, so the next step would be holding an interim meeting and hiking rates.”
BlueBay’s Timothy Ash was even more direct in his criticism, calling Tuesday’s action “a complete joke.” “Like 25 basis points will make any difference,” Ash continued, before telling Bloomberg that the central bank is now “limping to the next monetary policy committee meeting, which is weeks away and likely will have to have another late night, emergency MPC meeting before then to get the green light from Erdogan for a more substantive rate hike.”
You should not expect this to get any better. In fact, it’s likely to get materially worse. Any adverse news out the Zarrab trial and/or any further indication that Erdogan is going to make it difficult for the central bank to act will only exacerbate things.
The question now is how long before this has knock-on effects for EM more broadly.
Maybe Erdogan can put out the raging inflation with helicopter money?