Meanwhile, In Turkey…

He did it. Recep Tayyip Erdogan succeeded in bringing rates in Turkey back down into the single digits.

The country’s hopelessly beholden central bank on Thursday cut rates another 150bps, bringing the policy rate to 9%. Promises made, promises kept, I suppose.

Erdogan, self-declared “enemy of interest rates,” has long insisted that rates should be below 10% in Turkey, and that he fully intended to get them there. As far as I’m aware, it’s a purely symbolic target. Elections are coming, but even if they weren’t, Erdogan likes the optics around single-digit rates better — if rates are your archenemy, you’re not winning if they’re above 10%.

“The decision to cut rates today essentially remains a politically-motivated one. It answers the call from President Erdogan to bring the policy interest rate down to single digits (however unscientific this request may be) in order to support growth (at the detriment of price stability) ahead of next year’s key general elections,” TD’s Cristian Maggio wrote.

The problem, of course, is that inflation is quite high in Turkey. Headline price growth was 85.5% last month, and that’s according to the official data. You don’t have to be conspiracy theorist or some sort of anti-autocrat crusader to suggest the numbers may not be accurate. Less than two weeks ago, Erdogan removed the deputy chair of the country’s official statistics agency after just eight months on the job. This year alone, Erdogan replaced the agency’s chair, half its deputies and compelled (either directly, or indirectly as a result of exasperation) the resignation of two department heads with direct responsibility for the data.

A cost of living index published by the Istanbul Chamber of Commerce rose 109% YoY in October. An independent confederation of scholars estimated annual inflation at more than 185% last month.

In short, everyone harbors reservations about the veracity of the official, nationwide figures, but it scarcely matters if all you’re trying to do is paint a picture of folly. The official data will work just fine for that, as illustrated poignantly in the figure (below).

Rates are 9%. Price growth is nearly 10 times that at least. Officially, core inflation is around 70% and producer price growth was nearly 160% in October.

Thursday’s cut from central bank governor Sahap Kavcioglu was the fourth consecutive. The 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.

Note the reference to Turkey being a nominal democracy. Erdogan preserves the trappings of the democratic process. Turkey is a NATO member, and although Erdogan revels in overdramatized diplomatic clashes with Brussels and Washington, he’s nevertheless keen to preserve good standing with both. Some of that is just bragging rights — Erdogan, love him or hate him, is a man who can dial up the White House one day and stare down Vladimir Putin without turning to stone the next. There are very few leaders on Earth with a claim on that sort of ambidexterity. The balancing act requires pretending to be a democratically-elected leader while working to bolster autocratic bona fides at regular intervals so the world’s other strongmen don’t get the “wrong” idea.

Erdogan recently launched fresh military strikes on Kurdish forces across the border in Syria following a deadly bombing in a crowded shopping district in central Istanbul this month. Ankara made a show of reminding Erdogan’s domestic audience that the US backed, and fought alongside, Kurdish militias in northern Syria in the fight to stamp out ISIS. The Interior Ministry waved away a condolence message from Washington, likening it to “the killer being among the first ones returning to the scene.” That’s plainly ridiculous, but it serves a purpose. Erdogan drove a hard bargain this year when, fearing Russian aggression, Sweden and Finland sought NATO membership. Both countries should denounce Kurdish militancy in exchange for his blessing, Erdogan insisted. It was a disingenuous demand. Denouncing the PKK (a Kurdish group which Erdogan despises with a holy passion matched only by his vengeful disdain for the exiled Fethullah Gulen) isn’t the problem. Both the US and the EU consider the group a terrorist organization. Denouncing the YPG, the US-aligned, Syria-based Kurdish fighters whose links to the PKK are obscure, is less straightforward, and denouncing Kurds in general is quite difficult, particularly for Sweden, home to a sizable Kurdish diaspora.

While documenting this month’s Istanbul bombing, The New York Times innocently noted that “For many Turks, the bombing recalled tense days from 2015-2017 when such attacks were more common.” 2015 was also a year defined by fraught parliamentary elections. In June of 2015, Erdogan’s AKP underperformed at the polls. Two months later, Erdogan called a re-run for November, when the party performed much better. The months around the elections were marred by violence between the government and the PKK. It’s fair to say Erdogan leveraged security concerns to bolster AKP between the June vote and the November re-run.

Now, ahead of crucial elections in 2023, violence has flared anew. In retaliation for the Istanbul bombing, Erdogan launched a series of air, drone and artillery strikes on northeastern Syria, killing around two-dozen people, mostly civilians. America’s erstwhile Kurdish allies in the area fear another ground assault reminiscent of the brutal campaign launched by Erdogan in October of 2019, with what many described as a tacit blessing from Donald Trump.

The crucial point is that all of this — the rate cuts, the violence and what’s sure to be increasingly boisterous rhetoric from Ankara on all fronts — is consistent with the Erdogan political playbook. It has implications for markets, not just via the beleaguered lira, but also through Erdogan’s efforts to leverage the conflict in Ukraine to bolster his credentials as an indispensable intermediary between the West, Kyiv and the Kremlin.

Coming back to Thursday’s rates decision, Kavcioglu suggested the bank will now pause. “The Committee evaluated that the current policy rate is adequate and decided to end the rate cut cycle that started in August,” the statement said, after walking through the usual litany of excuses for a completely inexcusable policy bent given inflation realities.

In 2022, investors are used to thinking about policy “pauses” in terms of central banks pausing rate hikes. In Turkey’s case, the pause relates to rate cuts.

Kavcioglu’s Erdogan-compelled easing cycle has now pushed implied real rates in Turkey to negative 77% (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. I’d expect that to continue as the country gets closer to elections. Kavcioglu on Thursday reiterated the central bank’s “aim of encouraging permanent and strengthened liraization.”

Inflation in Turkey is more than 15 times target. The lira is down almost 30% this year versus the dollar.

“Without price stability, the lira will continue to be under pressure for the foreseeable future, even if it may not appear so evident given the scale of the underlying interventions includ[ing] the help of foreign funds deposited into Turkey,” TD’s Maggio went on to say, referencing a $5 billion deposit from the Saudis and funds from Russia. “Interventions to stabilize the lira also include transforming the government’s FX-linked deposit scheme into a heavy fiscal cost,” he added.

Earlier this month, during a televised interview, Erdogan complained that “They are constantly bringing up inflation.” “We’ll talk about it after New Year’s,” he said.