The ‘Enemy Of Interest Rates’ Is Not Holding The Turkish Central Bank Hostage, Why Would You Say That?

Listen, this Turkish lira story is funny.

Really, anything to do with Erdogan is funny. Unless you’re a Turkish journalist. Or a Turkish academic. Or a member of Turkey’s opposition. Or a Kurd. If you fall into any of those categories, there isn’t anything “funny” about Erdogan.

The lira is in a downward spiral ahead of early elections set for next month and the proximate cause for that downward spiral is Erdogan and his insistence on pushing his own theories about FX, rates and inflation, theories which are diametrically opposed to anything that even approximates economic orthodoxy.

He’s convinced that there’s a conspiracy afoot to keep rates artificially high and according to him, high rates cause inflation. As noted in our week ahead preview, Erdogan delivered a series of characteristically ridiculous comments at a speech in Istanbul on Sunday. Here’s the money quote:

I promise that inflation, interest rates and current account deficit will fall, that the Turkish economy will become more resilient to external shocks and financial attacks, that Turkey’s investment appeal will increase.

If that sounds like he’s assuming an election win, that’s because the election is of course a farce – the results are a foregone conclusion, which means he’s free to go ahead and make promises about what he’ll do once the “vote” consolidates even more power in his office.

The lira’s recent trials and tribulations have been well documented here and one of the points that more than a few analysts were keen on driving home following the fleeting rally in Turkish assets once Erdogan made early elections official, was that the idea of the currency rallying on a purported decrease in “uncertainty” brought about by getting the election out of the way is patently absurd precisely because the lira’s problems stem from Erdogan and the vote will effectively make him a modern day Sultan.

Well sure enough, the lira’s knee-jerk rally following the announcement that the elections would be held on June 24 was faded and a token 75bp late liquidity window hike by CBT wasn’t even close to enough to assuage concerns. Last week’s inflation data only exacerbated the situation, leading the lira to plunge to a fresh record low on Thursday, a plunge which continued early Friday before finally abating into the close. Here’s a fun annotated chart:

USDTRYAnnotated

Fast forward to Monday and the currency was under pressure again, fading the late Friday rally. The lira weakened some 1% to 4.2711 per dollar, near its an all-time low from last week while yields on 10- year government bonds jumped 14bps to 13.90% before a desperate CBT tried this:

  • CBRT LOWERS UPPER LIMIT OF ROM FX FACILITY TO 45% FROM 55%

Not to put too fine a point on it, but that’s a joke. They’re just trying to buy time. Basically, that’s a move to sap lira liquidity and provide banks with dollars, but to call it a half-measure would be an understatement. It brought a bit of relief but the market immediately faded it. Have a look at this chart going back to last week:

USDTRY

Meanwhile, Deputy PM Simsek echoed Erdogan in blaming “developments abroad” for the currency problem.

He also said the following in reference to whether Erdogan – who calls himself “the enemy of interest rates” – is keeping the central bank from getting this situation under control:

  • SIMSEK: CENTRAL BANK’S HANDS NOT TIED

If that sounds like the kind of thing someone would say when the central bank’s hands are in fact tied, that’s because it is.

But hell, I don’t know. Maybe I’m just a scheming “Gulenist tool” like Preet Bharara.


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2 thoughts on “The ‘Enemy Of Interest Rates’ Is Not Holding The Turkish Central Bank Hostage, Why Would You Say That?

  1. Pingback: If This Asset 'Never Lies', Then Markets Might Be In Trouble | Growth Investing Research

  2. the truth is that rising exchange rates cause inflation the more the economy depend on external inputs for it’s productions lines, and for developing nations that imports mostly of it’s technological devices, cars, computer chips, then exchange rates is a big component in inflation.

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