“Interest rates have fallen, are falling and there is another announcement due today”, Recep Tayyip Erdogan said, an hour before CBT delivered yet another rate cut, the fifth in a row.
At 75bps, the latest move isn’t massive, but it brings the total amount of easing under Governor Murat Uysal to 1,275bp.
Uysal 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. Turkey has now succeeded in driving real rates into negative territory, as we said they probably would a month ago.
Turkey’s real rate cushion is now gone. That is a gamble and puts the country at risk of capital flight, something analysts have been warning about over the course of Uysal’s campaign to placate the incorrigible Erdogan.
And yet, somehow, the market hasn’t really rebelled – yet. The lira is down since Erdogan made it clear who’s in charge of monetary policy, but it hasn’t been the kind of debacle you might expect, especially considering the October tumult in Syria, which prompted a series of threats from the US Congress, where lawmakers were already irritated with Erdogan over the S-400 debacle.
“CBRT does a market consensus 75bps cut then. I thought 50bps”, BlueBay’s Tim Ash sighed. “The drive to single-digits continues”.
Yes, yes it does. Erdogan has repeatedly pledged to cut rates into the single-digits and after today’s move, he’s almost there. The key rate is now 11.25%.
He continues to insist that Erdogan-o-mics (wherein lower rates lead to lower inflation) is a valid way to think about monetary policy, and CBT has been forced to agree, under threat of God only knows what. “At this point, the current monetary policy stance remains consistent with the projected disinflation path”, the central bank said Thursday.
So far, the numbers are cooperating, but by virtue of the fact that the “theory” itself makes no sense, it will not stay that way forever, especially if the tide ever turns against EMs again like it did in 2018. Inflation in Turkey has risen for two consecutive months, although it’s well off levels seen during 2018’s lira panic.
“Notwithstanding this foreboding development [of negative real rates], the CBRT may be comforted by the recent robust performance of Turkish assets as geopolitical tensions in the Middle East ratcheted down, oil prices moderated lower, global trade tensions shifted (dare we say) toward trade optimism, and favourable investor sentiment dominated trading flows”, SocGen’s Phoenix Kalen said Thursday, adding that “core CPI is still (just) in single-digits at 9.81% YoY, and 12-month ahead inflation expectations have continued a steady downward march”.
She goes on to write that “there is a persuasive case to be made that global disinflationary factors may largely contain upward inflationary pressures in Turkey over the coming quarters”. Even if that doesn’t turn out to be the case, Erdogan isn’t going to stand for higher rates if it means constraining the economy.
Meanwhile, Turkish equities hit records this week amid the global melt-up.
It wasn’t that long ago when the country’s stocks plunged into a bear market. In April and May, Turkish assets were beset by a laundry list of concerns, including a slumping economy, depleted foreign reserves, the erosion of democracy, the absence of central bank independence and the S-400 question.
As we put it back in December, there is arguably no more room for easing and 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.
But, as the reasonably stable lira and record stocks make clear, you can’t keep a “good” autocrat down.