“I’m real. I’m a real dictator!”, Donald Trump will exclaim, Pinocchio style, if ever he manages to emulate Turkish President Recep Tayyip Erdogan’s iron grip on domestic monetary policy.
Turkey slashed rates by another 200bps on Thursday, 50bp more than consensus was expecting, bringing the total amount of easing under Governor Murat Uysal to 1,200bps. Uysal delivered the largest cut in history shortly after being installed in July, after Murat Cetinkaya was unceremoniously ousted for refusing to ease fast enough to satisfy an impatient Erdogan.
“We will be moving to single digits in interest rates in 2020”, the incorrigible autocrat declared, earlier this week in the lead up to CBT’s final scheduled meeting of the year. Analysts have habitually underestimated CBT’s penchant for placating NATO’s favorite autocrat. Of the 1,200bps in cuts delivered over the last six months, consensus has predicted just 1,000 of them.
Inflation has come down markedly from the extremely hot levels seen during last year’s currency crisis, and generally speaking, the lira has remained stable, even amid the October geopolitical earthquake that accompanied Erdogan’s cross-border incursion in Syria.
And yet, as you can see from the visual, Turkey’s real rate cushion is now almost gone. That is a clear risk and puts the country at risk of capital flight.
“With headline CPI having risen back to 10.6% YoY in November, and with the CBRT as well as the government anticipating inflation to reach 12% by year-end, another substantial rate cut would effectively eradicate the real interest rate buffer”, SocGen’s Phoenix Kalen cautioned in a Tuesday note, adding that “Turkey continues to see modest outflows from the bond markets [and] after three consecutive meetings in which actual rate cuts have significantly exceeded expectations, the analyst community has recalibrated and is gearing up for a chunky triple-digit bp cut”.
Suffice to say Thursday’s move counts as “chunky”.
For now, Erdogan can justify this – sort of. The stable lira and inflation less than half of where it was at the highs in 2018 leaves some scope for easing, especially given the “recessionary dynamics still lingering in the Turkish economy” (to quote Kalen’s euphemistic assessment).
But, after today’s move, there is arguably no more room for easing. If there is, it is extremely circumscribed.
That reality will not stop Erdogan from pressing for more, though, you can be absolutely sure of that.
And unlike Donald Trump, when he “asks” for something from the central bank, he gets it.