Turkey - solid hike from the CBRT
It’s interesting that the market was a little disappointed with the 500bps policy rate hike today - some had been expecting another 750bps following on from the hike of that order last month.
https://www.tcmb.gov.tr/wps/wcm/connect/EN/TCMB+EN/Main+Menu/Announcements/Press+Releases/2023/ANO2023-35
But this is solid statement of intent from the CBRT, and let’s not forget that they have already hiked 2150bps in this hiking cycle. And, many people had assumed that terminal rates, even on an opposition win in the elections would be around 30%.
Simsek, Erkan, et al will no doubt argue that if you put 2150bps in rate hikes, and likely more to go, fiscal tightening and macro prudential measures together that the combined impact will be to subdue growth, and eventually win thru on inflation.
The challenge still is dollarisation as the authorities try and unwind the FX protected deposit scheme (KKM) which with high inflation still (65%) and heavily negative real interest rates still seeps into demand for dollars. High inflation and a wide current account deficit, plus the need to rebuild diminished FX reserves also weighs on the lira, risking a devaluation inflation spiral. They need to break that still and that has to be thru managing inflation expectations which is why rate hikes are still required. The drag on managing expectations I guess is the assumption that local elections due in March 2024 will ultimately cap the level of growth sacrifice that can be tolerated by the palace.
I spoke this week at a conference this week, and highlighted that Turkey now has the A team in terms of policy makers at the MOF, and the CBRT, and if anyone can manage thru all this without a systemic crisis it is this team. But I just worry that the scale of the problem is too large - unwinding all the financial alchemy that was put in place by the previous team before the elections - even for the current crew and that ultimately the IMF might be required at least to provide the bazooka. Perhaps this can be provided by new gulf money, but it needs to come sooner rather than later.