Prime Minister Erdogan’s declining patience: Four questions to Turkey’s central bank

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FILE PHOTO: In a January 24, 2014 file photo, the headquarters of the Central Bank of Turkey is located in Ankara, Turkey. Reuters / Umit Vectors // File photo

September 23, 2021

by Jonathan Spicer and Nevzat Devranoglu

ISTANBUL (Reuters) – Turkey’s central bank has begun preparations for a long-sought interest rate cut that President Erdogan has long sought, but after inflation rose and the lira fell, most analysts this week is triggered. I don’t think I will pull.

Banks have maintained a benchmark rate of 19% since March, when Erdogan installed Sahup Kvassiogur as the latest chairman. This makes it one of the highest policy rates in the world, as is Turkey’s inflation rate, which reached 19.25% last month, https://refini.tv/3laX5UN.

Ahead of the monetary policy meeting scheduled for Thursday at 2:00 PM (Greenwich Mean Time 1100) in Ankara, there are four important questions:

Is there any rate cut?

The central bank has changed its tone over the past few weeks, after months of sombre talk that allowed the lira to recover from its all-time low in June.

In a conference call with investors on September 1, Kavcioglu did not reiterate his long-term commitment to keeping policy rates above inflation. Two days later, data showed that inflation had actually exceeded 19% https://tmsnrt.rs/3yTLHBq and the real interest rate remained negative.

Kavcioglu also began to downplay this “headline” inflation rate and instead emphasized that the lower “core” indicators are more appropriate given the fallout from the pandemic.

In a speech on September 8, he said banks would focus more on key indicators that fell to 16.76%, as a nearly 30% increase in food inflation represented “short-term volatility”. The policy is strict enough to predict a fall in prices in the fourth quarter, he added.

Investors see this as a sluggish turnaround, suggesting interest rates are being cut. Some warn of “policy mistakes” if it’s too early.

Fourteen of the 17 economists surveyed by Reuters expect an easing in the fourth quarter, and two, including the International Finance Institute, expected to begin this week.

Ozlem Derisi Sengul, founding partner of Spin Consulting said: Istanbul.

How long does Erdogan wait?

Many analysts say Erdogan appears impatient with monetary stimulus, facing higher mortgages and tough elections until 2023.

In recent months, central banks have urged patience in the face of unexpected inflationary pressures from rising global commodity prices and increased demand in the summer, when pandemic rules are eased.

Despite the risk of currency depreciation https://tmsnrt.rs/3neUCLN and stubbornly high inflation, Erdogan will soon get what he wants.

A self-proclaimed “enemy of interest rates,” he exiled the last three central bank managers for 20 months due to policy discrepancies.

In June, Prime Minister Erdogan said he had spoken to Kabushioguru about the need to cut rates after August.

In early August, it was “impossible” for inflation to rise further, so “interest rates would start to fall,” he said.

“While President Erdogan continues to mount political pressure to cut rates, rising inflationary pressures will add to market tensions,” said Phoenix Scallan, global head of emerging market research at Société Générale. “.

When will inflation end?

Annual headline inflation remained high through October, began to decline in November due to the core effects of the boom late last year, and has been rising steadily since then.

The government estimates inflation to fall to 16.2% by the end of the year, but Goldman Sachs and Deutsche Bank expect it to remain at 16.7%. Most analysts say this should provide a rate cut window at least once in the fourth quarter.

However, as Turkey imports large quantities, further vulnerabilities in the lira could exacerbate inflation, complicate mitigation and even fail it. Higher import costs were reflected in a 45.5% annual increase in the producer price index last month.

Another risk is that the Federal Reserve Board will get rid of the pandemic stimulus faster than expected. This would boost US yields and hurt currencies in emerging markets with high foreign debt such as Turkey.

Analysts are largely convinced that the biggest problem is the loss of credibility of central banks due to political interference, with double-digit price increases over the past few years and inflation returning to the 5% target soon. It states that it is not so.

London School of Economics Professor Ricardo Reis, who published his paper this month https://www.brookings.edu/wp-content/uploads/2021/09/Losing-the-Inflation-Anchor_Conf-Draft.pdf Brookings Institution, Based on market forecast data from 2018 to 2012 to 2021, he said Turkey’s “inflation anchor has certainly been lost.”

How do investors and hedgers prepare?

When Kavcioglu eased inflationary pressure earlier this month, the lira weakened 1.5%, the biggest daily drop since May. It has fallen by about 15% since Cavsiogur’s predecessor Nasiagbal was replaced by Prime Minister Erdogan in March.

Foreign investors hold only about 5% of Turkey’s debt after reducing their stake over the years.

Still, some say exports, tourism revenue and recovery of central bank reserves make the lira’s asset more attractive.

Keelan Curtis, Portfolio Manager, Aberdeen Standard Investments, said:

“I think more work is being done on the part of the authorities towards mitigation (but) I don’t think anybody is expecting cuts at the next meeting,” he said.

In Turkey, prices of basic items like groceries and furnishings have skyrocketed, prompting individuals and businesses to skyrocket to record levels of the dollar and gold https://tmsnrt.rs/3jWu3sL. He had hard currency worth $238 billion this month.

(Additional reporting by Ali Kukukgokmen in Istanbul and Mark Jones in London; Edited by Hugh Lawson)

Prime Minister Erdogan’s declining patience: Four questions to Turkey’s central bank

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