“We’re cutting interest rates. And we will all see how inflation will start falling within months,” a hilariously defiant Recep Tayyip Erdogan said, on December 20, after unveiling a new scheme aimed at protecting local deposits amid a veritable collapse in the Turkish lira.
The effort, combined with what most analysts agree was large backdoor FX intervention, succeeded in halting one of the most harrowing bouts of currency depreciation in recent memory, but to say there are doubts about the plan’s long run viability would be to materially understate the case. The central bank has already adjusted the system once.
On Monday, the latest inflation data out of Turkey showed just how quickly the “benefits” of Erdogan’s economic policies are accruing to locals. Inflation rose a cartoonish 36.08% YoY in December, the most in almost two decades.
That very nearly matched the highest estimate from 19 economists. The range was 21.8% to 37.3%. I regret to inform you that the implied real rate in Turkey is now negative 22.1% (figure below).
Obviously, that’s the lowest among emerging markets and it’s a disaster. To put it mildly.
Perhaps even more remarkable was the MoM surge, an astounding 13.6%, up from 3.5% in November and nowhere near the expected 8.5% gain. Food inflation last month was 44%. Energy inflation was almost 43%.
“Overall, the December data show the impact of exchange rate developments, while a broad-based deterioration in pricing behavior, high trend inflation and increase in FX pass-through point to further challenges in inflation dynamics,” ING’s Muhammet Mercan sighed. “Given the latest hikes in electricity, gasoline and natural gas prices, inflation will likely remain under further pressure in the near term and above of the latest reading until late 2022.”
Recall that CBT governor Sahap Kavcioglu opened the door to the current easing cycle in September, when he shifted the bank’s focus to core inflation, which strips out food. But even if you go by core, real rates are wildly negative. Core inflation jumped an annual 31.9% last month.
The figure (below) illustrates just how perilous the current policy bent really is.
Also on Monday, Turkey said producer prices jumped nearly 80% YoY in December and 19% MoM.
BlueBay’s Tim Ash, who’s apparently done mincing words, said Monday that Turkey has “almost cult-like economic policy settings where economic logic, theory and experience are thrown out the window in favor of whatever mad economic theories the ultimate leader espouses.”
Ash called December’s inflation data “absolutely terrible.” Turkey, he remarked, “faces an inflation/devaluation spiral.”
H – Thanks for your continued coverage of Turkey, a wonderful country with a terrible government. Madness is the only way to describe what is going on there.