Got Inflation? Turkey’s Erdogan Has The Medicine!

If you have an inflation problem (and who doesn’t these days, right?) Recep Tayyip Erdogan has the medicine.

The remedy is rate cuts. Take 100bps (or more) every month or two as needed to control runaway price growth. If symptoms persist, or worsen, take more medicine.

On Thursday, Sahap Kavcioglu, Turkey’s beholden central bank governor, cut rates for the third consecutive meeting. This situation is positively ludicrous, and has been for the entirety of Kavcioglu’s tenure.

I assume most readers are familiar with the backstory, so I won’t recapitulate other than to restate the one-sentence summary: Erdogan harbors an unorthodox view of the interplay between rates, FX and inflation, and because Turkey is as close to one-man rule as a nominal democracy can be without losing the support of the West, there’s nothing anyone can do to prevent him from enshrining that view into the nation’s monetary policy.

Kavcioglu’s latest rate cut was 150bps, larger than last month’s move. He’s now cut rates by a combined 350bps over three meetings with inflation in Turkey running north of 83% (figure below).

I’d emphasize that inflation is probably higher than the official numbers suggest. A series of high profile departures from Turkey’s statistics office this year cast considerable doubt on the veracity of the data. PPI inflation is 152%. (Not 15.2%. 150.2%.)

There’s little utility in quoting the statement, unless it’s for comedic value. After recapping all of the reasons why inflation is still high around the world, and lamenting the rising odds of a global recession, Kavcioglu explained that,

It is critically important that financial conditions remain supportive to preserve the growth momentum in industrial production and the positive trend in employment in a period of increasing uncertainties regarding global growth as well as further escalation of geopolitical risks.

Usually, I’d agree. But, again, inflation in Turkey is 83.5%, according to Erdogan. There’s no telling what it would be if you brought in a team of independent economists, gave them unfettered access and the operational independence to publish accurate data.

The increase in the 12-month rate for September was the 16th in a row. Core inflation is near 70%. So, with apologies to Kavcioglu (not really, because Kavcioglu is fully, as opposed to begrudgingly, supportive of Erdogan’s policies), the preservation of “growth momentum” should take a backseat to the pursuit of price stability.

The financial media keeps calling Turkey “an outlier” in a world where central banks are almost universally hiking rates to fight inflation. That’s far too polite a euphemism. Erdogan is deliberately persisting in a potentially ruinous policy bent which, if he’s not careful, could dead end in an IMF program depending on the circumstances.

Kavcioglu’s reign atop CBT is the culmination of Erdogan’s long-running effort to commandeer the central bank. Implied real rates in Turkey are now negative 73% (figure above).

As a reminder, Kavcioglu and Erdogan are attempting to “structurally and permanently” (to quote Kavcioglu) break Turkey’s dependence on foreign currency. The associated macroprudential initiatives, including the promotion of a somewhat nebulous whole-economy “solution,” are often couched in nationalistic terms, and to the extent you can extract a semi-coherent strategy from Kavcioglu’s belabored attempts to elaborate, it’s not workable, it’s not feasible and it’s not realistic. Period.

Just this week, CBT raised the ratio of bonds that banks are required to hold for FX deposits. It was another attempt to bolster Kavcioglu’s “liraization” efforts. Starting next year, lenders with less than 50% of deposits in lira will have to hold an additional seven percentage points of bonds, which is a lot. They’re trying to forcibly boost lira deposits and compel conversion. The central bank (so, Erdogan and Kavcioglu) insists such conversion coercion has “strengthened banks’ balance sheets and supported financial stability.”

There’s no point in editorializing around this any further. Erdogan needs a lot of luck if he expects Turkey’s inflation crisis not to eventually undermine his grip on the country. The concern, obviously, is that the populace loses patience.

I’ll endeavor to put this as politely as I can, even at the risk of understating the case: Some worry Erdogan isn’t committed to the democratic process, and that in the event voters decide a change in leadership is in the country’s best interests, he won’t agree.

Commenting further Thursday, Kavcioglu reiterated faith in the central bank’s strategy. The monetary policy committee, he repeated, “expects the disinflation process to start on the back of measures taken for strengthening sustainable price and financial stability.”