Turkey will cut its monetary policy rate further from the current 9%, the country’s president, Recep Tayyip Erdogan, said on February 1 during a televised interview.
“The interest rate with us stands at 9% at the moment. We’ll cut this further. Because, my belief is, remember, during my term as prime minister, we cut the interest rate to 4.6%. At that time, inflation was around 6.4%. Because, I believe that interest and inflation are negatively correlated. Interest is cause, inflation is result. There could be those who don’t believe this. But, I believe things are this way. If this is the field, well my field is the economy too. And, the result is obvious. I’ve defended my thesis at many international meetings,” said Erdogan.
When it comes to ‘Erdoganomics’ there are those who discuss, those who joke, those who wonder if Erdogan is drawing us into surrealism and those who propose his is a case of a tragic lack of self-awareness. And there are those (remember, this has gone on for many years, now) who are bored stiff. Whatever the case, it can now be assumed that in Turkey more rate cuts are on the way ahead of the national elections called for May 14.
However, the story, the trajectory of Turkey’s policy rate, is one of perfect nonsense. There is no escaping it.
What’s more, there is no guidance on the timing of the upcoming rate cuts.
On February 23, the central bank’s monetary policy committee (MPC) is scheduled to hold its next rate-setting meeting.
In November, the MPC cut its policy rate to the 9% it stands at as of now. The December and January MPC meetings stuck with that 9%, and many analysts assumed the easing cycle—carried out despite rampant inflation—was over.
Of course, it’s best not forgotten that Turkey's policy rate and central bank essentially remain idle on the sidelines. The Erdogan administration conducts monetary policy via macroprudential measures and non-capital controls.
Chart: Lately, Turkey’s government allowed local banks to increase their lira deposit rates.
In 2022, net lira creation via loans jumped sky-high, with a figure of Turkish lira (TRY) 2.5 trillion ($133bn).
Chart: Turkish banking industry: annual lira loans flow.
In December, the record high level on a monthly basis was extended to TRY 313bn. In 2022, TRY 200bn for monthly rises emerged as the minimum level.
Chart: Turkish banking industry: monthly lira loans flow.
Meanwhile, the trade deficit has been breaking consecutive records. But there are observers who are convinced that the muscular figures released for tourism revenues are fake. The official data series for tourism revenues were recently revised.
Amid the booming lira supply and hard currency outflows, Turkey’s lira remains stable thanks to sticks held to the exposed backs of bankers by officials who demand the blocking of domestic FX demand. Also supportive are unidentified inflows and support from “friendly countries.”
There are three months now left until the presidential and parliamentary elections. Another lira tragedy would not come as a surprise. It could happen at any time.
The Erdogan regime is aiming to keep the lira stable prior to the polls. The elections will not be fair and this curious strongman will declare another puzzling victory. But he's got his work cut out to get there.
On January 3, the Turkish Statistical Institute (TUIK, or TurkStat) said that Turkey’s official consumer price index (CPI) inflation ended 2022 at 64% y/y after the base effect took hold.
On February 3, the January inflation figures will be released.
Last month, the central bank left its expectation for end-2023 official inflation unchanged at 22% (upper boundary: 27%).
The guidance was based on the assumption that the lira will not experience another crash. As of January 19, the USD/TRY pair was weaker by 1% at TRY 18.8 from 18.6 on October 27.
If the USD/TRY remains stable, Turkey’s official inflation figure is set to decline to the 30-40%s across 2023.
There is talk of price freezes ahead of the elections but they have yet to move beyond press releases. Retail chains and trade associations put out statements about freezing prices, but they continue hiking prices.
The turbulence-free mood on the global market continues. Turkey’s five-year credit default swaps (CDS) remain below the 600-level, while the yield on the Turkish government’s 10-year eurobonds remains below the 10%-level.