After months of witnessing a desperately plunging Lira, Turkey Central Bank on Thursday opted for a sharp hike in interest rates, despite the Turkish president’s long-standing sentiment that interest rates are pure evil.
Sometimes, there’s really no choice. Erdogan tried, first, to get Turks to sell their gold and other currencies and buy the lira, with incentives. That didn’t work, and the lira remained in freefall.
All the while, the Central Bank has resisted the obvious urge to raise interest rates because Erdogan wouldn’t allow it, even though the bank is meant to be independent.
Better late than never, the lira’s fall was stemmed when the Turkish Central Bank hiked interest rates from 17.75 percent to 24 percent to contain inflation that’s hit 18 percent.
The lira responded immediately Thursday, gaining over 3 percent to hit over 6 TRY against the U.S. dollar.
The odd thing was that the Central Bank went for the sharp hike on Thursday morning, right after Erdogan called for even lower interest rates.
While some speculate that the Central Bank blatantly acted against Erdogan, the more likely scenario is that this was all planned out this way—to shock the market and fool it into thinking the Central Bank is truly independent.
This way, too, Erdogan gets to maintain that he is still a true believer in low interest rates.
“It’s a clever move,” Anthony Skinner, a director with U.K.-based forecasting company Verisk Maplecroft, told Bloomberg. “By saying the central bank is independent while criticizing it for misguided policies, Erdogan is pointing the finger of blame at the central bank.” Related: UK Unicorn Eyes Flying Taxis By 2022
Clever, yes—and also unavoidable.
The lira has lost 40 percent since the beginning of the year, and part of its spiral was about a loss of investor confidence in Erdogan, and his questionable economic policy, as well as a raging diplomatic dispute with Washington that saw sanctions slapped on two key Turkish officials, along with a doubling of tariffs on imports of Turkish steel and aluminum.
Is it enough to restore investor confidence? Clearly, the Central Bank is hoping it is. The Associated Press quoted Istanbul-based economist Ozlem Derici Sengul as saying that the move “built credibility”.
But it’s not a cure-all. Fundamentally, the economy is still in big trouble, and no one believes that Erdogan is suddenly rational and predictable.
It also hasn’t helped that Erdogan has blamed the economic crisis on foreign manipulation. Or that he also recently lashed out at the credit ratings agencies as been political tools.
Moody’s and Fitch both expressed concern about the outlook for Turkish banks earlier this month, with Fitch estimating that banks’ foreign-currency lending now stood at around 43 percent of all loans.
Fitch emphasized that the decision of the agency regarding Turkey's 25 banks "reflects risks to their performance, asset quality, capitalization and, in most cases, liquidity and funding profiles."
Last month, Moody’s had lowered its rating on Turkey to Ba3 from Ba2, a step further into speculative territory. The move came a month after Fitch also lowered its rating on Turkey, warning that Ankara’s “incomplete policy response” to its deepening economic trouble was unlikely to stabilize its currency and economy for a meaningful amount of time”.
To Erdogan, it was all smoke and mirrors—and a Western ploy to destabilized Turkey. That’s not something investors get over easily.
By Fred Dunkley for Safehaven.com
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