Will Erdogan get more cuts? Four questions to Turkish central bank Reuters

By Tommy Wilkes and Jonathan Spicer

LONDON / ISTANBUL (Reuters) – Turkey’s central bank is expected to provide further interest rate cuts on Thursday – a move that President Tayyip Erdogan is likely to encourage, but analysts warn that inflation could rise and accelerate the disappearance of the lira.

The currency suffered a sharp sell-off on Thursday at 14:00 (1100 GMT) following the bank’s decision, which fell more than 6% in November and fell below the 10-dollar range https://www.reuters.com/world/middle-east/turkish- lira-hits-new-depths-ahead-another-expected-rate-cut-2021-11-16 / #: ~: text = ANKARA% 2C% November 2016% 20% (Reuters), 20% pressure and 20% 20% interest reduction .

Here are four questions from the central bank, which has cut rates by 300 points since September:

1 / WHAT WILL THE CENTRAL BANK DO?

Turkey is expected to cut 100 basis points https://www.reuters.com/world/middle-east/turkish-cenbank-cut-policy-rate-15-lira-hits-record-lows-2021- 11-11-% 15, according to a Reuters poll.

While inflation is at a 2-1 / 2-year high, analysts predict that lower-than-expected readings in October will increase the likelihood of a cut, although some may note that the speed of the last fall of the pound may remain in the hands of the bank.

GRAPH: Turkey rates and inflation https://fingfx.thomsonreuters.com/gfx/mkt/egpbkaqelvq/turkey%20rates.PNG

Erdogan has an unorthodox view that lower rates will dominate inflation and removed the last three central bank chiefs within 20 months because of political disagreements.

Governor Sahap Kavcioglu, who was appointed in March, ended his term in September when he laid the groundwork for easing talks for months. The central bank acknowledged last month that there was limited scope for further easing monetary policy by the end of the year.

However, recent cuts have undermined the rest of investors ’confidence in the bank’s independence.

Erdogan, an enemy who describes himself as an interest rate, has his eyes fixed on the upcoming election https://www.reuters.com/world/middle-east/turkey-cut-some-fixed-electricity-fees- support-consumers- 2021-11-08 than in mid-2023. As he is losing popularity in opinion polls, the pragmatic president may rethink the momentum of the monetary stimulus, or refuse to back down despite the pain of the lyre.

2 / HOW LONG CAN TURKEY PLAY IN THIS GAME?

Analysts say the reduction in rates is dangerous for double-digit inflation and the fall of the currency.

“Unless we see a significant policy reversal in Turkey soon, it looks like the country will enter a third currency crisis since 2018,” said Erik Meyersson, a leading economist at Stockholm’s Handelsbankenan, which specializes in Turkey.

Turkey has less ammunition than in previous years to defend the currency with foreign exchange reserves https://www.reuters.com/world/middle-east/turkey-raises-required-reserves-forex-liabilities-official-gazette-2021 -11-08. In the second quarter, central bank reserves covered imports in less than three months, down from 4.5 in 2019.

GRAPH: Turkish reservation cover https://fingfx.thomsonreuters.com/gfx/mkt/gkplgdakyvb/turkey%20reserves.PNG

But Turkey may not be able to cut much more, especially as central banks around the world, including the US Federal Reserve, are preparing to tighten their policy to reduce inflation.

“Going forward, we don’t think the current policy mix is ​​sustainable and rates will have to go up later,” Goldman Sachs (NYSE 🙂 analysts said, predicting rates by the end of the year to drop to 15% and then 300 basis points. points of increase in the second half of 2022.

Another risk is the large volume of debt denominated by Turkey in short-term dollars.

GRAPH: Turkey’s foreign debt https://fingfx.thomsonreuters.com/gfx/mkt/zdpxonkebvx/turkey%20external%20debt.PNG

3 / WHERE IS THE INFLATION?

Annual inflation https://www.reuters.com/business/cop/turkish-inflation-climbs-near-20-highest-2-12-years-2021-11-03 rose to 19.89% in October – four times in the middle the bank’s goal, although it says price pressures are temporary. Policy makers recently focused on core inflation, which stood at 16.83%.

Global pressures from rising post-pandemic demand, supply chain disruptions and rising energy prices have exacerbated weak lira pressures.

Producer prices rose by 46.31% year-on-year in October, with inflation expected to rise for several more months. Deutsche Bank (DE 🙂 predicts that inflation will be above 20% in the first half of next year and that 2022 will end at 16%.

GRAPH: Forex with local people and organizations in Turkey https://fingfx.thomsonreuters.com/gfx/mkt/akvezmxlapr/forex%20held%20turkish.PNG

4 / WHAT IS ERDOGAN’S FINAL GAME?

Strong inflation and falling lira have hit Turkish consumers hard, eating up profits. This has upset Erdogan, whose AK Conservative Party has ruled for 19 years with a reputation for providing a strong economy and domestic wealth.

Erdogan’s bet is that the rate cut will boost the economy by helping loans, exports and jobs. Economists say exports will benefit a weaker currency due to high external debt.

GRAPH: Lira timeline https://fingfx.thomsonreuters.com/gfx/mkt/zdvxonkjmpx/lira%20timeline.PNG