Some Key Geopolitical Context As Turkey’s Captive Central Bank Delivers Another Big Rate Cut

We’ve often marveled at Recep Tayyip Erdogan’s ability to get it goin’ when the proverbial chips are down.

The incorrigible Turkish autocrat has an uncanny ability to bounce back after getting waylaid either by circumstance or, more often, by blowback from his own power grabs.

Around this time last year, Erdogan was busy parlaying the intelligence his police state gathered on the Jamal Khashoggi murder into something of a geopolitical comeback, after a summer that found Ankara facing a currency crisis made worse by sanctions tied to the detention of Christian pastor Andrew Brunson.

In an incredibly deft move, Erdogan released Brunson during the same week that Khashoggi’s murder was grabbing international headlines. Khashoggi was killed in the Saudi consulate in Istanbul, and Erdogan had all the evidence. He contrasted Brunson’s release with Khashoggi’s murder, essentially asking Washington to explain why the Trump administration continued to pressure Turkey, a NATO ally, who had just met the demands of the White House, while steadfastly defending the unelected royals in Riyadh who had quite clearly murdered a Washington Post columnist in a heinous extrajudicial killing.

Shortly thereafter, sanctions were lifted, the lira continued to stabilize and the recession in Turkey notwithstanding, Erdogan enjoyed smooth sailing until March of 2019, when local elections delivered mixed results, and market turmoil reared its ugly head anew.

After a belabored effort to have the Istanbul mayoral election nullified, Erdogan eventually conceded that Binali Yildirim had lost. That, some Turkey watchers contended, was a humbling blow for Erdogan, who would surely be less brazen going forward in the interest of not seeing his grip on the country deteriorate further.

Instead, Erdogan doubled down on multiple fronts. On July 6, he fired the head of the central bank for the “crime” of not cutting rates fast enough. Just six days later, he took delivery of Russian-made S-400 missile systems despite repeated warnings from the US that doing so would come with dire consequences. That move came after a meeting with Donald Trump in Osaka, after which the US president appeared to suggest he wasn’t inclined to sanction Turkey over the purchases.

After muddling through the rest of the summer, Erdogan convinced Trump to green-light Turkey’s long-threatened cross-border incursion into Syria. After watching hundreds of America’s former Kurdish allies die in the ensuing “operation”, Mike Pence flew to Ankara and brokered a “ceasefire”, which effectively ceded control of a 20-mile-deep stretch of territory along Syria’s northeast border to Erdogan. In exchange for promising to refrain from committing genocide, Ankara procured a pledge from Pence that Trump would lift sanctions imposed a week after the violence started. Then, Erdogan struck a deal with Vladimir Putin that required Syrian Kurds to withdraw from positions west of the territory covered by the US agreement. Trump then officially lifted US sanctions which were only in place for a week. In the end, Erdogan got everything he wanted in Syria, with the possible exception of a permanent presence (it isn’t likely that Assad will countenance Turkish boots in the country forever).

On Thursday, Erdogan secured yet another personal “win”, when Murat Uysal (who took the monetary policy reins following Erdogan’s sacking of Murat Cetinkaya), delivered yet another large rate cut.

CBT cut the one-week repo rate by 250 basis points on Thursday, far more than the 100bps cut the market was expecting. No analyst forecast a cut that large. Thursday’s move brings the total amount of easing under Uysal to 10% (that is 10 percentage points).

Make no mistake, this was made possible by the favorable outcome (for Erdogan, anyway) of the turmoil in Syria. Had US sanctions remained in place, or if Russia had indicated that Assad would push back militarily on the Turks, it would have risked negating the currency stability engendered by more benign inflation outcomes, thereby making it more difficult for the central bank to keep cutting.

But, thanks to Erdogan’s maneuvering around the backlash to his Syria incursion, the coast was cleared just in time for CBT to deliver an outsized rate cut. The reaction in the lira was muted, all things considered. The chart gives you some perspective on how things have evolved for the currency over the last two years (top pane). The lira is the worst-performing EM currency this month (if you don’t count ARS), but as you can see, recent turmoil around the Syria debacle is nothing compared to more acute episodes.

“The central bank is pushing its luck, testing the market’s tolerance with the very fast pace of monetary-policy easing”, Rabobank’s Piotr Matys said Thursday.

Right. And you can be absolutely sure Erdogan will keep “pushing his luck”, and not just with rate cuts. He’s hard to box in geopolitically, and almost impossible to outfox.

It’s not clear whether his planned visit to the White House scheduled for next month is still on.


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