Turkey’s central bank cut the benchmark interest rate by 2 percentage points to 16% at its MPC scheduled on October 21. The rate reduction was double the 1 percentage point cut predicted by most economists. The delivered rate cut comes in contrast with the rising headline CPI inflation to 19.58% and the core inflation at 17% as of September. Yet fully in coordination with President Erdogan’s demand for lower rates as Turkey is marching towards the 2023 elections-perhaps earlier- and the AKP voter base is shrinking amidst economic difficulties.
The lira dropped to as low as 9.48 per dollar, a new all-time low.
In the note released with the decision the central bank said it was lowering the benchmark rate from 18 percent because an acceleration in inflation to almost 20 percent was “transitory” and tight monetary policy had started to have a higher than expected impact on commercial loans. The easing decision contrasts with the mentioning of rising global inflation, strong domestic demand and higher food and energy price inflation as TL weakens.
The bank hinted further rate cuts for the remainder of the year though at narrower margins.
Current central bank governor Kavcıoğlu, hired in March, lowered rates to 18 percent from 19 percent last month, sending TL to lower levels to a tune of 10% over the past month. Erdoğan sacked three of the seven members of the bank’s Monetary Policy Committee last Thursday.
“The Central Bank of Erdoğan manages to surprise the markets once again,” said Wolfango Piccoli, co-president and director of research at Teneo Intelligence.
“Insane monetary policy experiment going on in Turkey at present,” Tim Ash, senior emerging markets strategist at BlueBay Asset Management in London, said in e-mailed comments. “It feels like the lira and inflation will suffer the consequences.”
What the consequences will be?
No need to say with negative real rates, rising inflation and Fed about to switch to a tighter monetray policy, Turkish lira will continue to weaken against the USD towards double digits. Sooner than later at this current environment perhaps.
The expected base year effect for lower inflation seems designated to evaporate with the rising energy bill and domestic price adjustments. No need to say current account deficit shrinking for the remainder of the year will do little on the inflation front given the passthrough from extreme TL weakness. Erdogan’s wish to boost GDP growth in 2022 will be costlier than each previous episodes with 20% and higher CPI inflation turning as the new average.
Hence there is no need to discuss the fact that the MPC decision was politically motivated rather than economically rationalized. The early elections anticipated for the fall of 2022 might come around even earlier before the first half of 2022 expires.
GA.