Markets Shocked – Shocked, I Tell You! – To Discover That When Erdogan Says Low Rates, Erdogan Means Low Rates

The CBT is on deck as well, and that should be all kinds of amusing as it will be a good litmus test of how much central bank independence still exists in Turkey now that Erdogan has installed his son-in-law Berat Albayrakc as economic czar following the election.

That passage is from our week ahead preview, published on Sunday evening, and the implication there was that Turkey would likely disappoint markets when it comes to hiking rates now that Recep Tayyip Erdogan has consolidated virtually all power in his office and made economic policy a family affair.

The elevation of Berat Albayrakc marked an extremely disconcerting turn in Turkish politics as it clearly indicated that Erdogan intended to make good on his promise to take a more hands on approach to monetary policy following the June election.

The fact that Erdogan left no room for Mehmet Simsek was perhaps even more unnerving for markets. Fitch downgraded Turkey two Fridays ago in the wake of the Erdogan’s cabinet reshuffle.

Through it all, traders, analysts and investors were holding out hope that CBT would follow through on its implicit promise to keep hiking rates in order to bring inflation under control and restore some semblance of confidence in the currency. Markets were pricing a ~100bp hike on Tuesday.

Again, it’s not clear why anyone went into this policy meeting with high expectations for more hikes. Although the central bank deployed an emergency LLW hike, simplified monetary policy, delivered a hike to the one-week repo rate and continued to insist that they retained their independence, the writing has been on the wall for months: Erdogan would commandeer monetary policy once he emerged victorious from the (rigged) election.

And even if the writing wasn’t on the wall, Erdogan made sure that everyone knew what was going to happen. Days after calling interest rates “the mother and father of all evil” during a speech to the business community in Ankara, he delivered a truly hilarious deadpan interview with Bloomberg, during which he made it abundantly clear that while short-term measures might be necessary to shore up the flagging currency, after the elections he would lower rates.

With his son-in-law now in charge of the economy, and having altered some of the laws around central bank nominees, there was every reason to believe that Turkey would disappoint today and sure enough, they did, leaving the one-week repo rate unchanged.

The lira immediately plunged as incredulous traders attempt to wrap their heads around this.

10Y yields on Turkey’s bonds soared following the news while Turkish stocks careened lower.

Subsequently, it was time for everyone to act surprised.

“This is obviously a disappointing decision that shows the central bank’s priority doesn’t seem to be inflation targeting anymore,” Delphine Arrighi, a London-based fund manager at Old Mutual Global Investors said, lamenting the injustice of it all, while Bloomberg economist Ziad Daoud chimed in, noting that “inaction may trigger another vicious circle of capital flight, currency depreciation and runaway inflation”.

Nomura’s Inan Demir stated the obvious when it comes to central bank independence:

This decision essentially confirms the markets’ worst fears about the central bank’s independence and future course of economic policies in Turkey. Unless this policy mistake is corrected by an emergency rate hike very soon, the markets’ fears will translate into further substantial TRY weakness, which will put immense pressure on corporate and bank balance sheets.

BlueBay’s Timothy Ash is disappointed (again).

Turkey – hard for the CBRT to explain its decision not to hike today. June inflation rose over 300bps in YOY terms. They just undid any of the good work that Albayrak might have done over the past week in trying to rebuild the confidence of the market.

— Timothy Ash (@tashecon) July 24, 2018

Given the significance and risks from this surprise CBRT decision, having to wait five days for the minutes seems a very long time off. Would be better to have Centinkaya out there now explaining the decision, https://t.co/8Dlg5thjsE

— Timothy Ash (@tashecon) July 24, 2018

Not to put too fine a point on it, but any political scientist could have told you this was coming. I’ve generally tried to be somewhat measured in my assessment of this situation in these pages, but I’ll just come right out and say it: there is exactly nothing surprising about this and I don’t care what any strategist or EM fund manager tells you.

With that, I’ll just leave you the same way I found you here at the outset – with quotes from our week ahead preview.

“Investors’ focus has shifted to the upcoming MPC meeting as the recent amendments to the Central Bank of Turkey’s law, granting increased control to the President, combined with changes to the economic management team, have renewed investors’ concerns about the direction of economic policies in the medium term”, Barclays wrote last week, previewing this farce, and adding that reasonable people would think that “the imminent desire (and need) of politicians to offer markets a constructive narrative would strengthen the case for policy action”.

You’d think – but remember that there is nothing “reasonable” about Erdogan.

Albayrak was on the tape Sunday, promising that inflation would fall “considerably”, presumably on the back of multiple rate cuts, in accordance with his father-in-law’s version of economics, the guiding principle of which is that high rates produce inflation and currency depreciation.

For those of you wondering what it’s going to be like when Donald Trump puts Jared Kushner in charge of the Fed, watch the CBT on Tuesday for a possible preview.