[We] should cut this high interest rate.
That is most assuredly not what the market wanted to hear from Turkish President Recep Tayyip Erdogan just hours ahead of a key rates meeting at which the central bank is expected to hike rates. Last week, CBT pledged to take action following the latest batch of inflation data which showed consumer and producer prices soared in August, a month that saw the lira collapse under pressure from a stronger dollar, poor fundamentals, U.S. sanctions and, of course, Erdogan’s recalcitrance.
The annual inflation rate surged to 17.9% last month from 15.9% in July. That was worse than estimates.
(Bloomberg)
“I have never seen the central bank meeting its year-end inflation forecast,â€Â Erdogan said, in the speech quoted here at the outset, delivered at a Confederation of Turkish Tradesmen and Craftsmen meeting in Ankara.
He went on to fault the central bank for “wrong steps” and said his own views on interest rates remain unchanged. Erdogan, you’re reminded, insists that high inflation is the result of higher rates. “Interest rate is the reason, inflation is the result”, he insisted on Thursday, adding that “if you are saying the opposite, you don’t know this business”.
If that’s true, then nobody “knows this business” except Erdogan, because literally everyone is “saying the opposite”, which is why the lira is in such dire straits.
The central bank has a chance to reclaim control of the narrative on Thursday, but thanks to Erdogan’s comments, it appears that whatever they do, the market will remain on edge. You’re reminded that on Wednesday, the Turkish President put himself in charge of the country’s sovereign wealth fund and appointed his son-in-law and economic czar Berat Albayrak to the new board.
Last month, as the bottom fell out for the currency, the central bank instituted a kind of stealth hike. Specifically, they ceased offering one–week repo funding, which effectively forced everyone to use the overnight market. Here’s a visualization:
(Bloomberg)
Today, the central bank effectively had three choices, and former trader Mark Cudmore did a nice job of laying those out this morning. To wit:
- A hike of less than 125bps or less (leaving the 1-week repo below the current O/N lending rate) will lead to TRY slumping in the sessions ahead but maybe not to fresh lows.
- A rate rise of 150bps to 300bps and subsequently volatile trading leaves Turkey’s fate uncertain amid little net direction in the short term, but will most likely positive long term as the rebalancing story starts feeding through.
- A hike of 325bps or more (to above the current late liquidity lending rate) would offer a real chance to turn the Turkey story around for the long haul. The yields will suddenly start becoming too attractive for investors to ignore. And once sentiment returns, domestic holders of FX will start repatriating cash.
Well, as it turns out, CBT delivered something that’s not entirely impotent at first glance. Specifically, they’ve hiked the one-week repo rate to 24% and they have indeed restored it as the primary policy instrument. Here’s the press release:
The Monetary Policy Committee (the Committee) has decided to increase the policy rate (one week repo auction rate) from 17.75 percent to 24 percent.
Recently released data indicate a more significant rebalancing trend in the economic activity. External demand maintains its strength, while slowdown in domestic demand accelerates.
Recent developments regarding the inflation outlook point to significant risks to price stability. Price increases have shown a generalized pattern across subsectors, reflecting the movements in exchange rates. Deterioration in the pricing behavior continues to pose upside risks on the inflation outlook, despite weaker domestic demand conditions. Accordingly, the Committee has decided to implement a strong monetary tightening to support price stability.
The Central Bank will continue to use all available instruments in pursuit of the price stability objective. Tight stance in monetary policy will be maintained decisively until inflation outlook displays a significant improvement. Inflation expectations, pricing behavior, lagged impact of recent monetary policy decisions, contribution of fiscal policy to rebalancing process, and other factors affecting inflation will be closely monitored and, if needed, further monetary tightening will be delivered.
It should be emphasized that any new data or information may lead the Committee to revise its stance.
That’s good for a pretty substantial bounce in the lira (selloff in USDTRY):
Whether this is sustainable remains to be seen and I guess, in retrospect, Erdogan’s Thursday comments were meant to underscore the notion that no matter what the central bank does, his views on rates haven’t changed.
Of course Erdogan’s views are all that matters in the end, and he doubtlessly could have stopped the central bank from hiking had he really wanted to.
I suppose this will restore some shred of credibility for CBT, but as ever, I would caution against reading too much into it. Erdogan is in charge over there and if Thursday’s rhetoric is any indication, the “impressive” rate hike was nothing more than a begrudging nod to the market, as opposed to an honest acceptance of economic reality.
