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By Jonathan Spicer
ISTANBUL (Reuters) – Turkey’s central bank is expected to cut interest rates again this week, despite currency crunch and rising inflation as President Tayyip Erdogan continues to push for growth growth ahead of the 2023 elections.
The bank https://tmsnrt.rs/3pSEHT3 has cut its base rate by 400 points from September to 15%, according to Erdogan’s plan to prioritize exports and loans, even though economists and opposition lawmakers have said the move is irresponsible.
The central bank has sold the dollar four times this month to slow a volatile sale that closed the Turkish lira at 15 – a record low and half of its value in early 2021.
Here are five questions for the Central Bank policy meeting scheduled for 2pm (1100 GMT) on Thursday:
ARE RATES CONTINUED TO BE REDUCED?
The bank has announced at https://reut.rs/3s5yOo9 that it will cut rates again this month before pausing in January. Erdogan did not specify how far the rate would go, but reiterated that cuts were needed.
Analysts polled by Reuters expect a 100 basis point cut this week https://reut.rs/3m5CvGz. Only one respondent predicted that rates would remain stagnant, as further easing could exacerbate the loss of lira value and rising inflation, which stood at 21.3% in the last month.
Speaking to foreign investors this month, a central bank official said in response to a question that rates were more likely to stay at 15% in December given the fluctuations in the market, according to one participant.
But most analysts believe that Turkey’s easing cycle will continue, even as most central banks around the world are tightening their policies, leaving the country with very negative real rates.
To pave the way, Erdogan replaced the head of the central bank and finance ministry with officials of the same opinion this year. Everyone has taken https://reut.rs/3dQcZRq its low rate mantra.
“Putting pawns in important positions indicates that the fight for the country’s low interest will continue despite strong market rejection. But the market always wins this game of chess,” said Ipek Ozkardeskaya, an analyst at Swissquote.
WHAT ARE THE RISKS?
Turkey’s chronic trade imbalance means the lira’s weakness is turning into higher inflation through imports.
Reflecting the depreciation of the currency, the Turkish producer price index rose by almost 55% in November from a year earlier, prompting economists to predict that consumer prices will reach 30% next year, a five-fold official target.
Another risk is that companies will move away from the lira due to unpredictable exchange rates and inflation rates.
“There is no trade now, no money,” said Kemal Cakir, a 32-year-old sales representative for Cakirogullari Agricultural Machinery in Konya city. “We look forward to seeing more losses in the future.”
A further option is for companies to struggle to meet their foreign debt obligations, given that the country’s overall 12-month refinancing needs are nearly $ 170 billion.
However, in October, there was a current account surplus of $ 3.1 billion, helping to alleviate these concerns. Erdogan said keeping it black is essential to easing inflation and making it more self-sufficient.
DO ERDOGAN’S ASSISTANTS LOSE FAITH?
According to opinion polls, Erdogan and his Islamist-rooted AK Party are moving to a level of popularity unheard of for years, and would likely lose the return of the presidential election against some potential rivals.
Rate cuts are a risky bet https://reut.rs/3p2rw2R The 19-year-old Turkish leader is slowing down unemployment by forcing companies to invest and hire, even as price rises and the collapse of the lira are eating away at the Turks. profits.
Some AK voters told Reuters that they could support other parties in the next election.
Others are maintaining faith in a president with a strong base among rural and urban workers and the middle class. A survey by Metropoll shows that its approval rating https://tmsnrt.rs/3IO66hD has maintained almost 40% in recent months.
“The business is in turmoil and we have also been badly affected. However, I believe Erdogan will definitely be able to resolve this situation,” said a 50-year-old restaurant owner in the Black Sea city of Samsun, who declined to be named.
HOW MUCH DOES THE CENTRAL BANK SUPPORT LIRA?
The ability of the central bank to continue to intervene in so-called “healthy” foreign exchange (FX) rates depends on a number of factors: how much it uses already depleted foreign exchange reserves, how much it reduces rates, US Federal Reserve policy decisions and other central banks, and the Turks. Whether or not they add to the $ 231 billion hard currency record.
Technically, banks can use $ 124 billion in gross reserves, but net reserves are only $ 22 billion – and their holdings are very negative when it comes to exchanges with state-owned banks.
On Monday alone, the bank spent $ 2 billion and $ 2.5 billion buying lira, after falling short of the 14.99 record, according to estimates by bankers. It sold $ 2.5 billion in its first three market interventions last week, they said.
Atilla Yesilada, an analyst at GlobalSource Partners, estimated that the bank’s interventions could last up to six months, as long as monetary policy does not change. But he and others say that sales are wasting precious reserves during times of economic stress.
“Ultimately, the era of exchange rates is largely a game of confidence, and (the central bank) has lost it,” said Marc Chandler, Bannockburn’s chief global market strategist at Bannockburn.
HOW HAS LIFE CHANGED FOR TURKISH PEOPLE?
The rapid slip of the pound has upset home budgets, frustrated travel plans and left many Turks confused https://reut.rs/3GOBP0t to cut costs. Many now line up https://reut.rs/3IPq9vV to get subsidized bread in Istanbul, where the city council says the cost of living has risen by 50% in one year, including a 71% increase in rents.
Rising import prices have created a shortage of medicines and halted sales of mobile phones and other electronics as traders struggled to recalculate prices in the past month. Builders say some projects are being delayed https://reut.rs/33i8w7N due to high material prices.
The government is going to present an additional budget for 2022 https://reut.rs/3DVudHi because more spending and a higher minimum wage are needed, Reuters reported on Tuesday.
Street protests have only been occasional, largely due to years of police crackdown on civil disobedience.
“The only delay the president will face in the coming months is the social debate, which has led to a tumultuous market caused by the steady rise in inflation and the lira,” Lawrence Brainard told TS Lombard, a consultant. London.
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