Turkey cuts policy rate by 50bp to 8.50%, market expected 100bp reduction

Turkey cuts policy rate by 50bp to 8.50%, market expected 100bp reduction
*ENAG is an Istanbul-based inflation research group headed by economists that provides an assessment of where it sees inflation standing in reality. / bne IntelliNews
By Akin Nazli in Belgrade February 23, 2023

The monetary policy committee (MPC) of the Turkish central bank on February 23 resumed its rate-cutting, reducing the policy rate by 50bp to 8.50%, the authority said in a statement (chart).

The market expectation was for a 100bp cut.

Under the idiosyncratic monetary policy controlled by Turkey's Erdogan administration, however, the policy rate and central bank are essentially idle on the sidelines. President Recep Tayyip Erdogan’s officials conduct monetary policy via macroprudential measures and non-capital controls.

On February 1, five days before the shock dealt to the country by the February 6 earthquake disaster, Erdogan—building up to the May 14 elections that will now most likely be postponed—signalled that the policy rate was to be cut further.

In its statement that accompanied the announcement of the 50bp cut, the MPC said that its current monetary policy stance following a measured rate reduction was adequate.

In the coming period, analysts will watch for whether Erdogan is satisfied with 8.50% as the key rate or wants more easing.

He was last year expressing demands for a single-digit policy rate. That was delivered at 9% in November. The central bank then indicated that 9% was sufficient, but by the start of February, Erdogan let it be known that it was not.

Capital Economics said it anticipated another 50bp cut would be applied in March. But at the end of the day, given the rampant inflation in the country, there’s little to no difference in Turkey’s case between a benchmark of 8.50% and one of minus 8.50%, as market transmission is broken under ‘Erdoganomics’ and the country’s policy rate is a perfect nonsense.

On February 3, the Turkish Statistical Institute (TUIK, or TurkStat) said that official consumer price index (CPIinflation was recorded at 58% y/y in January.

In January, 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 would not experience another crash. As of February 23, the USD/TRY pair was weaker by 1% at TRY 18.88 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.

Amid the booming lira supply and hard currency outflows via record trade deficits, Turkey’s lira remains stable thanks to sticks held to the exposed backs of bankers by officials who demand the blocking and gumming up of domestic FX demand. Also supportive are unidentified inflows and support from “friendly countries”.

Another lira tragedy would come as no surprise. It could happen at any time.

It appears that with strongman Erdogan in charge delaying the elections remains a done deal. See Erdogan’s options here.

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.