Piling On To The "Surreal" Response To Turkish Turmoil: Here Comes The Central Bank

Update: Turkey's central bank indeed cut, and by 25 bps, in line with expectations:

  • Turkey central bank cuts top end of its rates corridor 25bps to 8.75%, as expected
  • Holds benchmark repo rate at 7.5%, as expected
  • Holds overnight borrowing rate at 7.25%, as expected

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In less than half an hour, the Turkish central bank will steal the public spotlight, if only very briefly, from Erdogan when it announces whether it will cut rates by 50 bps, 25 bps, (or - less likely - it won't cut at all). But in light of the recent stunning transformation in the country's political landscape, does this decision really matter? According to the market yes; according to Bloomberg's Richard Breslow, it is simply one more indication of how surreal the response to the Turkish turmoil has become.

Here is his full note.

Turkey Shouldn’t Be Confused With a Penny Stock

Much of the response to the turmoil in Turkey has been surreal, to say the least. While President Erdogan was rounding up thousands of alleged plotters, shuttering media, closing down a bank and accusing the U.S. of harboring the ringleader there has been a lively debate whether this means the central bank should cut 50bps today or only 25.

Do we possibly think it will make a difference? Apparently a lot of people do. In this age of monetary policy uber alles, every setback somehow gets sold as a buying opportunity. There are no long-term ramifications ascribed to anything.

“Valuations look cheap. Yields look attractive.” Forget that the tourist industry will be toast. That business and consumer sentiment are likely to tank. The news cycle will pass. After all there’s great sports on the television.

There was no shortage of assurances that the impact was localized and no reason this couldn’t be a “risk-on” day for the rest of us. No reason to worry about the European banks that have been betting heavily on Turkey. And just wait until Europe gets a freshly topped-up bill for the Syrian refugee deal.

Moody’s and Fitch immediately warned on the country’s ratings, citing instability. Can’t have that. IMF Managing Director Lagarde countered that “quick action” by the CBRT has calmed markets. Move along, nothing to see here.

So what if the war on terror just got more difficult, they’re a member of NATO. Oh wait, didn’t U.S. Secretary of State Kerry warn that Turkey’s behavior may make it unsuitable to be part of that organization? Tough words. But when this stress test is evaluated they’ll be deemed systemically important and too big to fail. Erdogan is counting on it. Someone had better tell ISIS.

Monetary policy can cure many ills. Sort of. But to think it can eliminate all geopolitical risk and societal failings is a dip too far to buy.