Timothy Ash comments on the rate hike decision: “flexible exchange rate will attract capital inflows”

In the end the markets were disappointed, with the new CBRT governor, Erkan, only managing to get a 650bps rate hike over the line. True, 650bps is a huge move, but when rates are only 8.5% as were, and inflation is just below 40%, 650bps does not really touch the sides to be fair.

Markets had been expecting 20-25% for policy rates, from 8.5%. But there had been lots of leaks/rumours coming out of Simsek’s meeting with local bankers last week that any rate adjustment would be gradual – obviously for fears of balance sheet problems for banks given they have been stuffed with TurkGBs at below market rates over the past year.

I get the need for some gradualism, and if this were a normal central bank, I think a 650bps hike and forward guidance of more to come would have been enough. But this is not a normal central bank, and after the hiring and then firing of Naci Agbal as central bank governor a couple of years back, forward guidance over potential for future rate hikes just does not work. Maybe it would if we thought that Simsek and Erkan would be in their jobs in a years times. But we simply do not really know how much backing from Erdogan, to do whatever it takes to fight inflation, they have.

So the market wanted a bird in the hand rate hike this time – get a big hike in the bag and let’s see where we stand.

As is a move to 15% rates, and when combined with comments by Simsek today that a flexible exchange rate will attract capital inflows kinds of shows that the thinking in terms of closing the external financing gap is a combination of some rate hikes, with a much weaker currency. The latter though will just see pass thru to inflation, eating away again at real policy rates.

A much cheaper lira likely might help attract capital inflows from the Gulf – note there that Simsek has been in the region this week, and the Gulf have been pushing Egypt to set a more competitive currency as the trigger for their investments there, so maybe its the same story for Turkey.

Hoping that CBRT governor Erkan does a call with investors over the next few days and interested to hear her thoughts therein.