The Kapali Carsi

The Central Bank of Turkey’s Janissary March

As you probably know, the Central Bank of Turkey saved Turkish Prime Minister Recep Tayyip Erdogan’s ass back at the end of January: If they hadn’t undertaken the emergency hike, the market rout could have resulted in a mini-crisis less than two months before local elections…

What has Erdogan done in return? Just been ungrateful! He has been pressuring the Bank to cut rates since then, most of the time extremely explicitly. Because His Highness believes that higher rates beget inflation, but I think he is also being influenced by his chief (non-economist) economy adviser Yigit Bulut.

Erdogan got what he wanted last week, when the Bank, surprising most analysts, cut its policy (one-week repo) rate to 9.5 from 10 percent. You can read my two cents (or rather kurus) on the decision in my latest Hurriyet Daily News (HDN) column. I have a few extra points to make:

First, here’s a more benign (than mine) interpretation of the Central Bank from Isik Okte, strategist at Turkish bank TEB: “We see Mr Basci as a firm believer in the carry trade and see this earlier-than-expected cut as a signal that he believes growth, not inflation, is Turkey’s real macro problem.”

Well, the problem is, growth is not doing that bad, as revealed by the latest leading indicators, such as last week’s real sector confidence indices and capacity utilization rates.

Yes, Turkey’s real problem is growth, but it is whether Turkey will be able to achieve 5-5.5 percent growth in “the new normal” without abundant capital flows or get stuck in the middle income trap forever. And the answer to this question is not monetary policy but structural reforms, as I have argued many times.

Anyway, I have even a more benign explanation for the Bank’s rate cut for you guys. Think of it this way: The Bank is cutting rates without actually cutting them. It can still keep market rates high by making most of its lending from the higher overnight rate, but it can keep Erdogan happy this way!

Speaking of the devil, you may have thought that Erdogan was happy with last week’s rate cut. On the contrary, he was extremely critical of the Bank on the return flight from his unofficial  presidential election rally in Germany. “Are you kidding” was his response to the rate cut… Yes, he is one ungrateful dude- or maybe he didn’t get tricked by the Bank:)…

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