Monday was a big day for soundbites from Steve Mnuchin.
In addition to insisting that the seemingly intractable trade war between the Trump administration and Beijing somehow isn’t contributing to the visible deceleration in the US economy, Steve managed to bully the Turkish lira a bit.
“We’re looking at that”, the Treasury secretary said, when asked about possible sanctions against Ankara in response to President Erdogan’s flagrant disregard for US demands around the purchase of Russian-made missile systems. “I’m not going to make comments on any specific decisions, but we are looking at it”, Mnuchin added.
The S-400 dispute has never been wholly resolved. The US moved to expel Turkey from the F-35 program in response to Erdogan’s belligerence, but lawmakers have pressed for more.
The lira was already under pressure as markets await what’s almost sure to be another sizable rate cut from the recently culled CBT.
Over the weekend, Erdogan declared that Turkey will cut interest rates to “single digits” in fairly short order. Inflation, he claimed, would follow rates lower. (Because that’s how it works in the upside-down world of Erdogan-o-mics – if you’re an emerging market economy and you’re concerned about inflation, you cut rates.)
SocGen’s Phoenix Kalen is looking for a 250bp cut this week from Murat Uysal, who delivered the largest cut in history shortly after being installed in July, when Murat Cetinkaya was unceremoniously ousted for refusing to ease fast enough to satisfy an impatient Erdogan.
“Recent events have persuaded us that the CBRT may attempt a relatively thin real policy rate buffer of 2-3%, as the central bank has reconciled itself to aggressive monetary policy easing in facilitating the government’s pursuit of a credit-fueled economic recovery”, Kalen writes, in a fatalistic-sounding new note. She adds the following useful color:
If headline inflation ends the year as the CBRT expects at 13.9% yoy, a 2-3% real policy rate range translates into nominal policy rates of 15.9-16.9% at year-end. That would suggest total policy rate cuts of 285-385bp between now and the year-end. If the CBRT delivers the substantial 200-275bp rate cut that the market expects this week, Turkish financial markets may be stable to slightly weaker. Worryingly, over a longer horizon, the trend toward overly loose monetary policy risks exacerbating Turkey’s age-old vulnerabilities by fueling the twin dynamics of inflation and attendant currency weakness. These dynamics can wreak havoc on a highly leveraged economy, where both the private and public sectors are heavily reliant on FX-denominated financing.
Yes, “these dynamics can wreak havoc on a highly leveraged economy [that’s] heavily reliant on FX-denominated financing”.
And as we saw in the summer of 2018 (when a recalcitrant Fed, Erdogan’s efforts to commandeer monetary policy and the Andrew Brunson soap opera together conspired to push Turkey into a currency crisis), any such “havoc” would be exacerbated materially by US sanctions.