Erdogan’s declining patience: four questions for Turkey’s central bank


The headquarters of the Central Bank of Turkey can be seen in Ankara, Turkey in this file photo from January 24, 2014. REUTERS / Umit Bektas // File Photo

  • As the world braces for a tougher policy, Turkey appears to be easing
  • Erdogan called for rate cuts despite rising inflation

ISTANBUL, Sept. 20 (Reuters) – Turkey’s central bank has started to prepare the ground for an interest rate cut long sought by President Tayyip Erdogan, although most analysts don’t think it will press the trigger this week after inflation surged and the lira took a drag.

The bank has kept its benchmark rate at 19% since March, when Erdogan appointed Sahap Kavcioglu as its last governor. This makes it one of the highest policy rates in the world – although the inflation rate in Turkey too, which reached 19.25% last month.

Ahead of a monetary policy meeting set for 2:00 p.m. (11:00 GMT) Thursday in Ankara, here are four key questions:


After months of hawkish rhetoric that allowed the pound to recover from a historic low in June, the central bank has changed its tone in recent weeks.

During the September 1 conference calls with investors, Kavcioglu did not reiterate his long-standing commitment to keep the key rate above inflation. Two days later, the data showed inflation has indeed exceeded 19%, leaving real rates negative. Read more

Kavcioglu has also started to downplay this “headline” inflation figure and instead emphasized that a “base” measure – which is weaker – is more appropriate given the fallout from the pandemic. Read more

In a speech on September 8, he said that a nearly 30% increase in food inflation represented “short-term volatilities,” so the bank will focus more on the core measure which fell. at 16.76%. He added that the policy was strict enough and predicted a downward trend in prices in the fourth quarter.

Investors have taken all of this as a dovish shift that suggests rate cuts are on the way. Some have warned of a “policy error” if they arrive too early.

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

“While most don’t expect any rate cuts, the bank’s new guidance suggests that it wouldn’t be surprising to see one on September 23 if it considers that a slight deceleration in inflation below. -jacent is permanent, ”said Ozlem Derici Sengul, founding partner of Spinn Consulting, in Istanbul.

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Many analysts say Erdogan seems increasingly impatient to benefit from monetary stimulus, given that loans are expensive and he faces a tough election no later than 2023. Some say a cut rapid rates could even signal plans for an early vote. Read more

In recent months, the central bank has urged patience amid unexpected inflationary pressure brought on by rising global commodity prices and rising summer demand as pandemic restrictions have eased.

Despite the risk of currency depreciation and stubbornly high inflation, Erdogan will likely get what he wants soon.

A self-proclaimed “interest rate enemy”, he ousted the last three central bank chiefs over a 20-month period over political disagreements.

In June, Erdogan said he spoke to Kavcioglu about the need for a rate cut after August.

In early August, he said, “we will start to see a drop in rates” as it is “no longer possible” for inflation to rise. Read more

Tensions in the markets “are set to increase as President Erdogan continues to step up political pressure for rate cuts as inflationary pressures intensify,” said Phoenix Kalen, global head of research on interest rates. emerging markets at Societe Generale.

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Headline inflation is expected to remain high until October and start to decline in November due to the base effect of a surge at the end of last year, since which it has steadily increased. Read more

The government expects inflation to fall to 16.2% by the end of the year, while Goldman Sachs and Deutsche Bank will see 16.7%. That should provide a window for at least a fourth quarter rate cut, according to most analysts.

Yet, as Turkey imports massively, further weakness in the pound could push inflation up and complicate or even thwart any easing. High import costs were reflected in the 45.5% annual jump in the producer price index last month.

Another risk is that the US Federal Reserve will remove its pandemic-era stimulus earlier than expected, which would increase US yields and hurt currencies in emerging markets with high external debt, such as Turkey.

Analysts say the bigger problem is the central bank’s diminished credibility in the face of political interference, leading to years of double-digit price hikes and little confidence that inflation will soon return to a 5% target.

Ricardo Reis, professor at the London School of Economics who submitted an article this month at the Brookings Institute, found that Turkey’s “inflation anchor looks definitely lost” based on market expectations data from 2018 to 2021.

Annual rate of change for major emerging market economies


When Kavcioglu downplayed inflationary pressure earlier this month, the pound weakened 1.5% in its biggest daily decline since May. It has depreciated nearly 15% since Erdogan replaced Kavcioglu’s hawkish predecessor Naci Agbal in March.

Foreign investors only hold around 5% of Turkey’s debt after reducing their holdings for years.

Still, some say rebounds in the central bank’s exports, tourism receipts and foreign exchange reserves are making lira assets more attractive.

“With stocks so low in Europe, I don’t see how exports are not going to continue to do well,” said Kieran Curtis, portfolio manager of Aberdeen Standard Investments.

“I feel like there is more of a movement towards a loosening of the authorities (but) I don’t think anyone expects a reduction at the next meeting,” he said.

In Turkey, soaring prices for basic commodities such as food and furnishings prompted individuals and businesses to grab hold of record levels of dollars and gold. They held $ 238 billion in hard currency this month.

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Additional reporting by Ali Kucukgocmen in Istanbul and Marc Jones in London; Editing by Hugh Lawson

Our standards: Thomson Reuters Trust Principles.


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