Turkey’s ‘Stunning’ Rate Hike And The Folly Of Misreading Autocrats

Believe it or not, Recep Tayyip Erdogan let Murat Uysal hike rates on Thursday.

Turkey careened into another one of its regularly scheduled currency crises over the summer, as Erdoganomics (a fantastical religion predicated in part on the notion that lower rates are key to a stronger currency and thereby to containing inflation) collided with reality.

These high-speed collisions happen from time to time and, really, it’s a small miracle that Uysal’s tenure hasn’t been defined by an outright calamity.

Read more: Turkey Plunges Into (Another) Currency Crisis. Is Anyone Surprised?

Uysal replaced Murat Cetinkaya last summer, after Cetinkaya failed to slash rates fast enough to appease a perpetually impatient Erdogan. Since his installation, Uysal delivered a total of 1,575 bps worth of easing in a bid to pacify NATO’s favorite autocrat, who last year vowed to bring rates down into the single-digits.

Of course, when Erdogan vows to do something, it’s not generally advisable to stand in his way. In fact, depending on what it is he’s trying to accomplish, impeding his path could easily land you in jail or far worse. And, so, Uysal did manage to push rates into the single-digits. Incredibly, that was accomplished without a total meltdown, although there have been intermittent periods of drama.

The cuts (in red) pushed real rates in Turkey deeply negative, which isn’t generally advisable if you rely on external financing. Thursday’s hike (green in the figure above) was 200bps, putting the one-week repo rate at 10.25%, roughly inline with where the weighted average cost of funding sat on Wednesday.

This represents Erdogan bowing to market pressure. With apologies to all the EM “experts” out there, it is patently absurd to suggest CBT delivered a 200bps hike (red dot below) without clearing the decision with Erdogan first.

If you don’t follow this charade on a weekly basis, note that authorities did everything possible to avoid hiking the one-week repo rate, which was enshrined as the benchmark in May of 2018 during an extremely turbulent period for the lira (exacerbated at the time by tensions with the Trump administration tied to the Andrew Brunson saga).

Recent efforts to arrest the lira’s slide by herding folks into more expensive funding windows were generally seen as a regressive step — a de-simplification of CBT’s rates framework. Those measures came on the heels of increasingly desperate interventions by state lenders to support the currency, at the expense of the nation’s reserves.

As usual, Erdogan did have an ace up his sleeve — a rabbit in the hat. Ankara’s announcement (last month) of a big natural gas discovery might have helped restore confidence, but ultimately, the market proved unforgiving. And so did Moody’s, which downgraded Turkey earlier this month, warning of a balance-of-payments crisis.

CBT offered a justification of Thursday’s move. “Pandemic-related supply-side inflationary factors were expected to gradually phase out during the normalization process and demand-driven disinflationary effects were expected to become more prevalent”, the bank said. “Yet, as a result of fast economic recovery with strong credit momentum, and financial market developments, inflation followed a higher-than-envisaged path”.

That’s a euphemistic way of saying that Erdogan’s “run it hot” approach and the concurrent slide in the lira posed a serious threat to price stability. Like every other government in the world, Turkey took a variety of steps to ease the economic strain from the pandemic. Most of those steps were negative for the currency.

“The Committee assessed that the tightening steps taken since August should be reinforced in order to contain inflation expectations and risks to the inflation outlook”, CBT went on to say.

Thursday’s surprise hike was accompanied by the usual optimistic chatter from the emerging market analyst Twitterati. (And yes, that’s a thing.)

Is it a positive step? Well, sure. I guess. But if you think for a second that Erdogan cares what anybody thinks or that this wasn’t merely an unavoidable step taken in the interest of expediency rather than promoting long-term stability, you are sorely mistaken.

“The pivot runs the risk of angering Erdogan, who’s a firm believer that high rates cause inflation”, Bloomberg wrote, stating the obvious, before dryly noting that “most economists and central banks around the world believe the opposite to be true”.

Earlier this month, responding to the Moody’s downgrade, Erdogan said this: “Do what you want to do, your ratings are of no importance”.


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