Recep Tayyip Erdogan’s adventures in obstinance continued on Thursday when, as expected, Turkey’s beholden central bank delivered a fourth consecutive rate cut.
At this juncture, the term “ill-advised” is wholly insufficient. CBT is hostage to what Erdogan believes is political expediency, and it’s manifesting in one of the more deliberately perilous policy bents I’ve personally ever witnessed, at least in terms of what it conveys about the belligerence of the man making the decisions.
Earlier this week, I lamented that market participants will “never admit the truth” about Erdogan’s Turkey. I doubt seriously that any postmortems of today’s rates decision will feature the word “autocrat,” let alone “dictator.” Implied real rates in Turkey are now below -7% (figure below).
There was some speculation that Erdogan might be convinced to hold off on another cut after additional declines in the lira compelled CBT to intervene repeatedly, but governor Sahap Kavcioglu and new finance minister Nureddin Nebati are apparently all-in on this ruinous undertaking.
Kavcioglu has delivered 500bps of easing in just three months, even as inflation accelerated beyond 20% (figure below).
Consistent with the statement language from November, CBT indicated that December’s cut will be the last of the current cycle. “The Committee decided to complete the use of the limited room implied by transitory effects of supply-side factors and other factors beyond monetary policy’s control on price increases,” the December policy statement read. The “limited room” rationale is meant to suggest that because some factors pushing up prices are likely to be ephemeral, CBT had leeway to cut rates.
As ever, the trajectory of policy from here depends on Erdogan. In the simplest terms, the central bank has virtually no say in this. Monetary policy is almost solely a function of one man’s decision calculus.
Bloomberg on Thursday wrote that Erdogan’s aversion to higher rates is “linked to Islamic proscriptions on usury.” On “his economic model, cheaper borrowing will boost manufacturing and create jobs while inflation eventually stabilizes,” the same linked article said.
There’s some truth to all of that, but again, I’d reiterate that Erdogan is an autocrat and there’s a lot of political utility in fighting a quixotic, never-ending battle against an amorphous cabal of purported conspirators, both foreign and domestic, both real and imagined. That’s right out of the autocratic playbook. That so many analysts and EM investors don’t immediately identify it as such is a testament to an acute lack of cross-disciplinary training.
The “cumulative impact of the recent policy decisions will be monitored in the first quarter of 2022,” CBT went on to say. To make the obvious joke, those “monitoring” the “cumulative impact of recent policy decisions” during the fourth quarter of 2021 will note that the lira has collapsed (figure below).
The currency fell as much as ~6% Thursday to a new record low following the decision.
CBT said that going forward, “all aspects of the policy framework will be reassessed in order to create a foundation for sustainable price stability.”
Erdogan was poised to announce a minimum wage hike on Thursday. The monthly minimum this year was 2,826 liras. That was roughly $380 at the beginning of 2021. It’s half that now.
Talk about watching a trainwreck in slow motion.
Should pick up speed shortly.
I believe the clinical term for Mr. Erdogan is “madman.”