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Trading  | May 23, 2018

In a desperate attempt to prevent a currency crisis just as the Turkish Lira was crashing to record lows, dragging Turkish bonds and the broader economy with it, today the Turkish Central Bank did what many expected it would do long ago: it hiked rates in an emergency meeting, pushing the Late Liquidity Window rate higher by 3% to 16.5%.

While some, such as Fidelity and Old Mutual, were content with the move saying the central bank did “just enough” to calm the market, many said that the 3% hike may not be enough, as the floated “whisper” stabilization rate was as high as 20%. To wit, Brown Brothers Harriman said that the Turkish central bank’s decision to raise its benchmark rate by 300 basis points to 16.5% is “a very weak response” to the depreciation in the lira. Shamaila Khan, director of emerging-market debt at AllianceBernstein, echoed the skepticism saying the move by the Turkish central bank to stem a slide in the lira “is a step in the right direction, but won’t be enough to change market sentiment.” Wells Fargo similarly said that the Lira support is only temporary, noting that “without more concrete and sustained signs of central bank commitment to bringing down inflation, the Turkish currency will likely remain under pressure going forward.”

Also skeptical was Capital Economics whose economist Jason Tuvey said that “while today’s move has provided some support to the currency, investors are likely to be waiting for signs that this represents a more fundamental shift in policy.” BBVA was on the same page saying that the reaction from the Turkish central bank should be enough to stem the late selloff, but more is needed to restore credibility. “It’s finally a reaction and topped our initial expectation of an emergency 250 hike.”

Others, such as SEB EM strategist Per Hammarlund took on a slightly different approach, and said that for the monetary policy to be effective, Turkish authorities will need to reduce fiscal stimulus programs to restore the confidence in the lira and prolong the relief from the 300 bps rate hike: “The substantial hike will give the TRY relief, but unless it is followed by additional measures, the relief will be temporary.”

The most critical, however, was BlueLay EM strategist Timothy Ash who slammed the rate hike decision as too late. saying the credibility of Turkey’s central bank has been “shot to hell” and Turkey’s policymakers are “far behind the curve.”

Ash also said that “It seems likely that the economy team and the central bank implored President Erdogan to give them the green light to hike rates.”

Which, of course, is the real problem here and the punchline, because recall that the most precipitous phase of the TRY selloff started one week ago, when on May 15 during a Bloomberg interview, Erdogan point blank said that he would “take responsibility for monetary policy”, effectively threatening to take over the position of central banker.

“Of course our central bank is independent,” Erdogan said. “But the central bank can’t take this independence and set aside the signals given by the president, who’s the head of the executive. It will make its evaluations according to this, take its steps according to this. And I believe this will result in very beneficial steps in the future.”

“From the moment we move to a presidential governing system, our effectiveness there will be very different,” he warned. “We’re going to do this so we can be held accountable for the responsibility we’ve taken.”

So it may well be that a vow from Erdogan not to interfere in monetary policy is what will ultimately be needed to truly calm the market. And, he may have just done that when in a televised speech to former lawmakers in Ankara, Erdogan said that Turkey will comply with global principles guiding monetary policy after the June 24 election.

“In the new government system, we’ll continue to abide by the global governance principles on monetary policy. But we will not let global governance principles finish off our country,” Erdogan says, presumably saying that he will not take on the role of central bank governor. He also added that Turkey will never abandon principles of open and free markets, and said that Turkey has the capability to prevent problems emanating from lira volatility.

Perhaps… but knowing Erdogan he will promptly change his mind once he realizes “how high” interest rates are, a level which markets will not consider to be high enough, and continue the selling

Most concerning, however, was the following demand by Erdogan of his fellow citizens:


Consider it a form of verbal capital controls, just without the actual prison sentence.

This is notable because the last time Erdogan told Turks to exchange their Dollars into Lira, was in December 2016, when the Lira was trading at 3.50. In other words, those who listened to Erdogan a year and a half ago, lost over 30% of their purchasing power.

For now, the tag-teaming between the central bank and the president appears to have arrested the collapse in the lira, which was last trading at 4.5671, well higher than the intraday low of 4.9253.

Tomorrow, however, is another story, and we wouldn’t be surprised if the selling resumes as the market tests just how real the CBRT’s conviction is, and how high Erdogan will allow rates to rise before cracking down and imposing his own style of “macroeconomics.”


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