One week after Turkey's authoritarian ruler Recep Tayyip Erdogan (who is the de facto head of every government institution in the NATO-member country including the central bank) ratcheted pressure on the central bank to cut interest rates in keeping with his unorthodox mantra that lowering borrowing costs helps lower inflation and stimulate the economy, and telling AHaber TV “no more high interest-rates because high interest rates would bring us higher inflation,” investors and FX trader were on edge ahead of today's Turkish central bank meeting fearing that in order to save their jobs TCMB (Turkey Central Bank) puppets would do Erdogan's bidding and slash rates.
To their relief, and to Erdogan's anger, that did not happen and instead the TCMB kept its policy rate unchanged at 19.0% in line with the unanimous consensus expectation.
Overall, there was little change in the press release from the previous one as once again the TCMB noted that “...the current tight monetary policy stance will be maintained decisively until the significant fall in the Inflation Report's forecast path is achieved” and that it will determine the policy rate at “...a level above inflation to maintain a strong disinflationary effect until strong indicators point to a permanent fall in inflation and the medium-term 5% target is achieved.” The TCMB's July Inflation Report foresees a higher inflation trajectory but there was no discussion of this in the press release.
Remarkably with the benchmark rate at 19%, real rates in Turkey are now negative with inflation hitting 19% recently and rising above the key level in recent weeks.
Some more details:
In line with the unanimous consensus expectation, the TCMB kept its policy rate on hold at 19%. The changes to the press release following the MPC meeting were relatively minor.
- The TCMB stated that “...the current tight monetary policy stance will be maintained decisively until the significant fall in the Inflation Report's forecast path is achieved”. Previously, the MPC would refer to the April Inflation Report but the July Inflation Report has been published and the MPC is very likely referring to this. The July Inflation Report has a higher inflation trajectory but there was no discussion of this in the MPC statement. One may interpret this as a move in a dovish direction as the TCMB may be ready to cut with year-end inflation at 14.1%yoy (its July projection) rather than 12.2%yoy (its April projection).
- Once again, the TCMB stated that it will determine the policy rate at “...a level above inflation to maintain a strong disinflationary effect until strong indicators point to a permanent fall in inflation and the medium-term 5 percent target is achieved.”
- The TCMB's assessment of inflation was broadly unchanged. It once again pointed to the rise in import and administered prices, demand conditions, supply constraints in some sectors, volatility due to the reopening and high levels of inflation expectations as risk factors to the inflation outlook. The Bank noted that the rise in inflation in July was due to increasing food inflation on the back of supply-side effects led by climate conditions, high levels of agricultural commodity prices internationally and reopening effects.
- The Bank remains upbeat on growth and especially on external demand. It dropped its reference to the deceleration in domestic demand in Q2 and noted that economic activity remains strong in the third quarter with the help of robust external demand. Similar to the last MPC statement, the TCMB noted that the vaccination roll-out is helping the services and tourism sectors, leading to a more balanced composition in economic activity. The Bank continues to expect the current account to be in surplus in the remainder of the year.
- Similar to the last MPC statement, the TCMB noted that commercial loans are exhibiting a mild course and that it is “monitoring the adequacy of the macroprudential measures to curb personal loan growth, which recently displayed a rise due to the reopening and deferred demand”.
Going forward, Turkey will remain trapped by soaring inflation and what appears to be an upper limit on rates: Goldman expects inflation to remain elevated and edge up further towards 19.5%yoy until September and only fall to 16.0%yoy by the end of the year (consensus: 16.3%yoy, TCMB: 14.1%yoy). Looking ahead, Goldman does not expect Turkey to be able to lower rates before Q4 even if that will further infuriate Erdogan. Furthermore, in the event that inflation rises above 19.0%yoy, the bank thinks that the TCMB will look through this despite its guidance, unless the Lira comes under significant pressure.
And while the risk remains that Erdogan will snap and again decide to fire the entire leadership in the TCMB as he has done frequently in the past, the market's kneejerk response was favorable and the Turkish lira extended gains to as much as 0.9%, trading at 8.5647 last after rising as much as 8.5278. Bonds and stocks also gained.
And now we wait to see how Erdogan responds to the central bank openly flouting his demands for lower rates. If history is prologue, expect a whole lot of terminations over the next week.