Yeah, so in the traditional Sunday week ahead preview, I reminded those of you who care that it was time for inflation data out of Turkey and that the data would invariably be a disaster.
CBT is getting set to meet on the heels of a series of steps taken to arrest the run on the lira. Those steps began with a second LLW hike in the space of a month and culminated in an announcement that the central bank is simplifying monetary policy going forward. That was the context for Monday’s closely-watching inflation data.
As you’re aware, inflation has spun out of control in Turkey, a development that, in Erdogan’s mind, is due to interest rates that are too high, and that right there underscores why folks are so concerned about what happens to central bank independence after this month’s election (i.e., will his unorthodox views on FX, inflation and rates become enshrined in monetary policy as he suggested in a laughably deadpan Bloomberg interview from last month?).
The lira’s good week (it pared gains on Friday, but overall, last week brought some welcome respite) was due not only to the CBT official announcement on policy simplification, but also to indications that the country will be willing to hike rates in the week ahead (on Thursday) if Monday’s inflation data surprises to the upside. Here’s Bloomberg:
Turkey is prepared to raise interest rates again if inflation accelerates, according to two money managers who met with Turkey’s central bank Governor Murat Cetinkaya and Deputy Prime Minister Mehmet Simsek in London Tuesday. The lira extended its advance.
Further tightening will depend on May inflation data to be released on June 4 and the nation won’t resort to introducing capital controls, the people cited the officials as saying. They asked not to be identified because the meetings were private.
Here’s how things have evolved since the emergency rate hike (Friday’s weakness was attributed to downgrade concerns/rumors):
Well, now we have the data and headline printed the highest in six months while core came in at a truly disconcerting 12.64%:
If you read all of the above, you can probably guess that the lira actually rallied on this because it suggests CBT might be inclined to follow through on their promise to hike again if the inflation data “warrants” it (the scare quotes are there to indicate that obviously tighter policy is in order, it’s just a matter of Erdogan’s tolerance for it).
The problem now is that having set expectations, CBT will have to follow through or risk another run on the currency. Remember BlueBay’s Timothy Ash? He’s the guy who noted late late last month the the central bank’s credibility is “shot to hell“. Here’s what he had to say on Monday:
[The inflation print] will leave the central bank very little wiggle room at its next monetary policy meeting (June 7) now not to hike again. Anything less and I think they will leave themselves very vulnerable.
Right. For his part, Simsek was on Twitter trying to do some damage control:
Got that? Don’t worry, eeeeeverything will be fine “after the election.” Just make Erdogan Sultan and all of these problems will go away.
We’ll leave you with Credit Suisse’s take:
Today’s data – on its own – does not strongly support the case for further monetary policy tightening on Thursday (7 June), in our view, but Central Bank Governor Cetinkaya’s (somewhat unclear) guidance to investors in London on 29 May suggests that it is not possible to completely rule out a measured hike (of perhaps 50bps) in the one-week repo rate on Thursday. At this stage, we attach about 15% probability to further monetary policy tightening on Thursday.
- Today’s data do not offer significant new information on the near-term inflation outlook than what was already known on 23 May when the monetary policy committee (MPC) hiked the central bank’s funding rate by 300bps to 16.50% and dropped its hawkish bias (“… if needed, further monetary tightening will be delivered”) in the post-meeting statement.
- However, Cetinkaya reportedly said in investor meetings in London on 29 May that the MPC might tighten monetary policy further if inflation accelerates in May (a strong possibility even on 23 May). Some people who attended the meetings with Cetinkaya in London interpreted his statement as saying that the MPC would tighten monetary policy further if the May inflation data surprised to the upside.
- We think Cetinkaya has given a somewhat unclear message to investors on 29 May. However, it is exactly because of this unclear message, the MPC might have to hike the one-week repo rate further (perhaps by 50bps) to 17.00% on Thursday.
- An additional argument for further tightening on Thursday might be the level of the USDTRY exchange rate. Given that the central bank reacted with a statement when USDTRY hit 4.50 for the first time during the day on 16 May, we think the central bank would like to see USDTRY around 4.50 or stronger (compared to the current level of 4.62).
We think that the cumulative policy response to the lira’s depreciation since early March has been powerful, but the underlying weaknesses of Turkey’s monetary policy – namely a reactive MPC and unclear central bank communication – have not been addressed