Turkey's Erdogan Vows To "Significantly" Cut Rates As Trump Set To Roll Out Sanctions Over S-400 Purchase

Lately not a week passes without some dismal news involving Turkey hitting the tape, and yet the lira continues to levitate, blissfully ignorant of the storm clouds headed for Ankara, levitating on hopes the Fed will cut rates and sprinkle golden showers on emerging markets. However, in light of the two latest developments, the Mrs Watanabe sellers of USDTRY may finally pay attention.

On Sunday, Turkish President Recep Tayyip Erdogan - who last weekend fired the head of the central bank for not cutting rates fast enough, and who has now become the de facto head of the CBRT - promised "significantly lower interest rates by the end of the year", Bloomberg reported.

“We aim to reduce inflation to one digit by the end of this year,” Erdogan told journalists in Istanbul, according to the state-run Anadolu news agency. “As we achieve this, we will achieve our year-end interest rate target as well." Of course, should interest rates drop to one digit, the USDTRY will promptly collapse to two, as the rate differential between the lira and the dollar collapses, removing the main incentive to go long the lira at a time when the Turkish economy remains in crisis.

Having founded the economic school of Erdoganomics, according to which inflation can be achieved only by lowering rates, the Turkish president and his US counterpart have quickly become kindered spirits when it comes to monetary policy. And just as Trump heaps pressure and insults on Fed Chair Powell, Erdogan has frequently accused the central bank of keeping borrowing costs too high. Last month, he complained that while the Fed was moving toward a rate cut, Turkey’s policy rate of 24% “is unacceptable.”

Then, the last trace of any pretense that Turkey under Erdogan will forever be a banana republic came on July 6, when Erdogan unexpectedly dismissed the former central bank head, Murat Cetinkaya and made it clear that he expects his replacement as central bank governor to follow the government’s line on monetary policy. Cetinkaya had held rates steady for more than nine months.

Meanwhile, even as Trump and Erdo may be BFFs when it comes to firing head of central banks, the US president and his advisors have reportedly settled on a sanctions package to punish Turkey for receiving parts of a Russian S-400 missile defense system and plans to announce it in the coming days, Bloomberg wrote in a separate report.

News of the imminent sanctions was somewhat unexpectedly considering that when Trump and Erdogan met at the G-20 summit in Japan in June, the U.S. president suggested possible leniency on sanctions. He sought to blame the Obama administration for Turkey’s decision to buy the Russian equipment, saying the impasse is “not really Erdogan’s fault.”

According to Bloomberg, the administration "chose one of three sets of actions devised to inflict varying degrees of pain under the Countering America’s Adversaries Through Sanctions Act, the people said, without identifying which set had been chosen. The plan needs Trump’s approval."

Russian Il-76, carrying the first batch of equipment of S-400 missile defense system, arrives at Murted Air Base in Ankara, Turkey on July 12, 2019.

Trump is said to unveil the sanctions late next week, and - in an unexpected act of courtesy to Ankara - intends to wait until after Monday’s anniversary of a 2016 coup attempt against Turkey’s President Recep Tayyip Erdogan to avoid fueling further speculation that the U.S. was responsible for the uprising. And while we don't know the details of the prepared sanctions, we know the following:

The plan was developed after days of discussions between officials at the State and Defense departments and the National Security Council. It awaits a sign-off by Trump and his top advisers, the people said, requesting anonymity to discuss a sensitive matter. A State Department spokeswoman declined to comment.

While not nearly as bad as that with other non-Saudi middle-eastern nations, the relationship between the U.S. and Turkey has deteriorated over the course of the civil war in Syria, where U.S. backing for Kurdish militants frustrated Turkey, which considers the group an extension of the separatists it’s fighting at home. Erdogan has also criticized the US for not extraditing Gulen, whom he accuses of masterminding the fake attempted "coup" the served as the launchpad for Erdogan's transformation to an "executive president" last year, read quasi dictator.

Acting U.S. Defense Secretary Mark Esper said Friday that Washington’s position that Turkey can’t have both the F-35 and the Russian missile system “has not changed.” Esper spoke with Defense Minister Hulusi Akar in the afternoon, and the Turkish government said in a statement that a U.S. delegation would visit next week to keep discussing the issue.

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