... there is no guarantee Turkey will do what’s necessary with monetary policy. It’s far more likely they’ll resort to half-measures.
I long ago ran out of sympathy for Turkey watchers when it comes to hoping against hope for a rational monetary policy response aimed at stemming declines in the lira. Now I’m out of patience too.
The excerpt above is from a Tuesday post documenting the latest developments around President Erdogan’s successful bid to nullify the Istanbul election, which will now be re-run next month, presumably to the benefit of AKP.
Read more: Burnt Turkey.
The reference to “half-measures” was an allusion to CBT’s policy toolkit which, basically, doesn’t include any hammers, but rather consists of a few soft, rubber mallets the central bank can feebly wield in the service of pounding down USDTRY spikes without irritating Erdogan, whose disdain for rate hikes is surpassed in fervor only by his hatred of Fethullah Gulen and the PKK.
The lira on Thursday fell past 7 to the euro and to the lowest since September 24 against the dollar amid ongoing worries about the state of Turkey’s democracy and generalized risk-off sentiment tied to escalating trade tensions.
Predictably, CBT suspended use of the one-week repo facility, effectively driving funding costs up by forcing folks into a more expensive window. Simply put, this is one of the bank’s soft, rubber mallets and it underscores a cynical take on last summer’s “simplification” of the country’s absurdly convoluted rates framework – i.e., what was the point?
If you’re wondering whether Thursday’s move is going to arrest the lira’s slide, the answer is definitely “no”.
In fact, you could easily argue that CBT would have been better off not doing this again, because these half-assed, Band-Aids only serve to validate concerns about the central bank being hamstrung in their capacity to defend the currency. The bounce in the lira was so fleeting on Thursday that it barely showed up on an intraday chart (bottom pane).
If you’re wondering how Turkish equities are feeling about this situation, note that the Borsa Istanbul is essentially in free fall. Thursday is on track to be the sixth consecutive day of losses. The gauge has only managed to rise in three out of the last 14 sessions.
For the punchline, we go to Bloomberg, who notes that “the central bank’s next monetary policy meeting is scheduled for June 12, shortly before a rerun of municipal elections in Istanbul.”
Suffice to say I do not envy policymakers who will have to decide how to simultaneously support the lira ahead of the Istanbul re-vote without hiking rates.