“[We’ve] decided to implement a front-loaded and strong additional monetary tightening”… is something you don’t hear everyday from Turkey’s central bank.
But traders heard it on Thursday, as CBT hiked by 200bps, considerably more than expected.
The move marked a continuation of Governor Naci Agbal’s efforts to restore faith in local monetary policy, a tall order considering Recep Tayyip Erdogan’s famous aversion to rate hikes.
Erdogan shook things up in November when Turkey looked poised to careen into another one of its regularly scheduled currency crises (first red shaded area, below). Agbal was allowed to hike rates to arrest the lira’s slide (green shaded area), but skeptics worried Erdogan’s tolerance for tighter policy would run out sooner rather than later.
The lira’s rebound paused last month as US yields pushed higher (second red shaded area, above).
Thursday’s hike took the total amount of tightening under Agbal to 875bps. That makes for quite the juxtaposition with Murat Uysal, who, in his first 14 months on the job, delivered 1,575bps worth of easing.
Thursday’s hike was twice the size of the 100bps move the market expected. “Domestic demand conditions, cumulative cost effects, in particular the exchange rate effects, increasing international food and other commodity prices and high levels of inflation expectations continue to affect the pricing behavior and inflation outlook adversely,” CBT said, citing “upside risks to inflation expectations” in explaining the hike.
The forward guidance was aggressive. “The tight monetary policy stance will be maintained decisively, taking into account the end-2021 forecast target, for an extended period until strong indicators point to a permanent fall in inflation and price stability,” CBT promised, in the statement.
The move takes real rates for Turkey to 3.4% on my math, easily the highest among major developing markets.
“Turkey’s import-intensive and oil-dependent economy renders it more vulnerable than many commodity-exporting EM countries that have been able to benefit from the recent upswing in commodity prices,” SocGen’s Phoenix Kalen wrote this week, ahead of the meeting. “Additionally, a highly pressurized external environment of rising US Treasury yields, a resurgent DXY, and wild swings in market sentiment have taken its toll on Turkish assets,” she went on to say, noting that “Turkey has essentially no room for error, considering the extent to which the currency is under pressure, the lack of FX reserves, the acceleration of inflation readings, the deterioration of inflation expectations, and the stress generated by the reflationary external environment.”
I’m a perpetual skeptic when it comes to Erdogan’s patience for higher rates. I find it difficult to believe he’ll countenance much more in the way of hikes.
As one FX strategist put it, “I would hike, but we’re in the business of trying to forecast what they will do, not what they should do — the two things don’t always match. In Turkey, they almost never do.”