How far can you go? Five questions for Turkey’s central bank


ISTANBUL, Dec. 15 (Reuters) – Turkey’s central bank is set to cut interest rates again this week despite a currency crash and runaway inflation as President Tayyip Erdogan keeps pressure on policymakers to promote growth ahead the 2023 elections.

The bank has cut its policy rate (TRINT = ECI) by 400 basis points to 15% since September as part of Erdogan’s plan to prioritize exports and loans, although economists and lawmakers in the opposition say these measures are reckless.

The central bank also sold dollars four times this month to slow a volatile sell-off that left the Turkish lira close to 15 for the greenback – a record low and half its value at the start of 2021.

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Here are five questions ahead of the central bank’s policy meeting scheduled for Thursday at 2 p.m. (11 a.m. GMT):


The bank said it would cut rates once more this month before taking a hiatus in January. Erdogan did not specify how much he wants rates to drop, but reiterated that cuts are needed.

Analysts polled by Reuters are expecting a drop of 100 basis points this week. Only one respondent predicted that rates would remain unchanged, as further easing could exacerbate the depreciation of the pound and spike in inflation, which stood at 21.3% last month.

On a conference call with foreign investors this month, a central bank politician said in response to a question that there was a higher likelihood that rates would stay at 15% in December given the market turmoil, according to one participant.

But most analysts believe Turkey’s easing cycle will continue, even as most central banks around the world tighten their policies, leaving the country with deeply negative real rates.

To lead the way, Erdogan this year replaced the leadership of the central bank and the finance ministry with like-minded officials. Everyone has embraced his low interest rate mantra.

“The placement of pawns in important positions indicates that the country’s fight for a low interest rate will continue despite the massive rejection of the market. But the market always wins this chess game,” said Ipek Ozkardeskaya, analyst at Swissquote.

Turkey’s ‘real’ interest rates have plunged


Turkey’s chronic trade imbalance means that the weak pound translates into higher inflation through imports.

Reflecting the currency’s depreciation, Turkey’s producer price index climbed nearly 55% in November from a year earlier, prompting economists to predict consumer prices would hit 30% l next year – five times the official target.

Another risk is that companies will shy away from reading it given the unpredictability of exchange rates and inflation.

“There is no trade now, there is no cash,” said Kemal Cakir, 32, a sales representative at Cakirogullari Agricultural Machinery in the central town of Konya. “We expect to see larger losses in the future.”

A more distant possibility is that companies are struggling to meet foreign debt obligations, given the country’s overall 12-month refinancing needs of nearly $ 170 billion.

The current account posted a surplus of $ 3.1 billion in October, however, which helped allay those concerns. Erdogan said staying in the dark is key to lowering inflation and becoming more self-sufficient.

Turkey IIF private sector external maturities


Opinion polls show that Erdogan and his Islamist-rooted AK party are sliding to levels of unpopularity not seen in years and that he would likely lose a second round of the presidential election to some potential rivals.

Rate cuts have been a risky bet for the Turkish leader for 19 years that he can reduce high unemployment by forcing companies to invest and hire, even as rising prices and the collapse of the pound weigh on earnings for companies. Turks.

Some AK party voters have told Reuters they may support other parties in the next election.

Others remain confident in a president who has a solid base among the rural and urban working and middle classes. A Metropoll survey shows its approval rating has held steady at nearly 40% in recent months.

“Business is terrible and we have also been deeply affected. Nonetheless, I think Erdogan will certainly be able to remedy this situation,” said a 50-year-old restaurateur in the Black Sea town of Samsun, who refused to give his name.

November Pulse Metropoll Poll


The ability of the central bank to continue intervening to tackle what it calls “unhealthy” exchange rates (FX) depends on several factors: to what extent it draws on already depleted foreign exchange reserves, to what extent. it cuts rates, cuts the policy decisions of the US Federal Reserve and other central banks, and if the Turks add to their hard currency holdings nearly record $ 231 billion.

Technically, the bank could dip into $ 124 billion in gross reserves, but net reserves are only worth $ 22 billion – and its holdings are deeply negative when trading with state banks is factored in. Read more

On Monday alone, the bank spent between $ 2 billion and $ 2.5 billion to buy the lira after briefly crashing to a record 14.99, according to bankers’ calculations. It sold $ 2.5 billion in the first three market interventions last week, they said.

Atilla Yesilada, analyst at GlobalSource Partners, estimated that the bank’s interventions could last up to six months, as long as monetary policy is unchanged. But he and others say sales squander valuable reserves in times of economic crisis.

“Ultimately, the era of floating exchange rates is a game of confidence to a large extent, and (the central bank) has lost it,” said Marc Chandler, chief market strategist at Bannockburn Global Forex. .

Turkish reserves


The rapid decline in lira has wreaked havoc on household budgets, undermined travel plans, and pushed many Turks to scramble to cut costs. Many are now lining up for subsidized bread in Istanbul, where the municipality says the cost of living has risen by 50% in a year, including a 71% increase in rents.

Soaring import prices created drug shortages and briefly halted sales of cellphones and other electronics as retailers rushed to recalculate prices last month. Builders say some projects are being held up by high material prices.

The government is set to present a supplementary budget for 2022 due to the need for additional spending and a higher minimum wage, Reuters reported on Tuesday.

Street protests have been sporadic in large part due to a years-long police crackdown on civil disobedience.

“The only setback the president is likely to face in the next few months is due to social unrest, sparked by ever higher inflation and messy markets triggered by the continued depreciation of the lira,” said Lawrence Brainard of TS Lombard. , a consultancy firm in London.

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Additional reporting by Zeynep Berkem and Dominic Evans in Istanbul, Tuvan Gumrukcu in Konya, Ece Toksabay and Nevzat Devranoglu in Ankara, and Marc Jones and Karin Strohecker in London; Editing by David Clarke

Our Standards: Thomson Reuters Trust Principles.


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