Well, I’m not exactly sure this was a “surprise” (as it’s being billed), but CBT hiked 125bps on Thursday (one-week repo – which they’ve reverted to following last week’s announcement re: the simplification of policy – to 17.75% from 16.5%).
The lira is obviously up handily on the news:
As Bloomberg’s Benjamin Harvey notes, 125bps was 25bps more than the highest prediction among folks surveyed, but remember: CBT backed themselves into a corner on this last week when officials signaled that the scope of today’s action would be dictated by Monday’s inflation print. Well, Monday’s inflation print didn’t say anything good about the extent to which the situation is continuing to deteriorate.
The market is extremely concerned about central bank independence and Erdogan’s already infamous Bloomberg interview left little doubt as to who has the final say over monetary policy. His iron grip on that will only become more draconian after the election.
With CBT’s credibility in tatters, had they not “surprised” today with an aggressive hike, the lira would have probably plunged. When everyone is already concerned about the situation and you then compound things by explicitly saying that you’re going to act forcibly in the event the next inflation report warrants it, well then you’d better follow through on that, and “bigly”, or risk a scenario where markets try to interpret whatever action you do take through the lens of Erdogan’s overbearing influence.
The only way to avoid a cynical market take is to figure out what the most aggressive estimates are (in terms of a hike) and then beat that by some round number which, in the context of rate hikes, is 25bps. That’s all they did here.
Bloomberg calls the omission of references to the subordinate policy rates “a sign of commitment to simple policy.” That seems like a pretty charitable interpretation. I mean, if all it takes for the CBT to restore its credibility and make the market believe it’s committed to policy simplification is a hike they literally telegraphed last week and a decision to make no reference to the other rates, well then the market is pretty goddamn gullible.
“[This is] impressive CBT action after being seen as behind the curve for months,” ING’s Petr Krpata remarked.
“Turkey passed the most important test of its commitment to orthodox monetary policy by raising rates again,” Renaissance Capital’s Charles Robertson mused, adding that “if they had not raised rates today, the risk of capital controls after elections would have been significant [but] now it’s a much smaller risk.”
I don’t know how long it’s going to take for everyone to come to terms with the fact that exactly none of this is done without Erdogan’s consent and that that consent is predicated not on concerns for CBT credibility, but rather out of concern for political expediency, but what I do know with absolute certainty is that as soon as he feels like the run on the lira is over, things will go right back to the way they were and he’ll go right back to shrieking about lower rates in public speeches.
Buyer beware.
— Heisenberg Report (@heisenbergrpt) June 7, 2018
It is incredible to see that TRY appreciated more than 10% against a strong USD.
Some ‘investors’ are giving a push to keep the islamists in power in Turkey. But, the short term govt and corporate debt (corporate debt is guaranteed by the Turkish Treasury, btw, even though nobody from Bloomberg acknowledges)
Current account deficit > USD 50 billion, short term debt > USD 300 billion, net reserves ~ USD 17 billion.
Counting down for the Minsky moment.