Turkey’s central bank went for some shock therapy on March 18, bringing in a “front-loaded” policy rate (one-week repo) hike of 200 bp to 19%, giving currency traders, whose expectations were built on the likelihood of only a 100 bp increase, a positive surprise.

It amounted to an unequivocally hardcore and pre-emptive “orthodox” move, the like of which has not been seen in Turkey for more than a decade.

The USD/Turkish lira (TRY) rate responded in predictable fashion, moving into the 7.32s from the 7.42s within minutes (it remained 2% stronger d/d at the end of the trading day, outperforming all peers), while the Borsa Istanbul’s banking index (XBANK), which has been under heavy pressure recently, quickly gained by 3% d/d after the rates announcement.

But enough of the adrenalin, let’s pick this apart. Turkey’s new economic management team, selected and installed by the Erdogan regime since the country last early November found itself on the edge of the precipice of another balance of payments crisis, is led by new central bank governor Naci Agbal. And the last five months have seen Agbal emerging as a challenger to the Patriarchate of Constantinople when it comes to orthodoxy.

The patriarchate, however, has been at the centre of orthodoxy since the fourth century and the new chapter in Turkey’s economic affairs that has brought us the “orthodox” version of the Erdogan ruling apparatus will need a few years to emerge as a serious challenger. Switching from the Erdogan moustache to the patriarch beard might help.

Nevertheless, as things stand, the burnt fingers of Erdogan and his abettors, seem to have learnt the lesson that one should not fight with the global finance industry after creating a hot money junkie economy.

As a next step, the regime might find it fruitful to learn about how currency volatility delivers a whole series of terrible headaches. But there can be no confidence yet that the Turks are going to be let off the economic rollercoaster or that Erdogan is going to give up on his cheap money-fuelled boom and bust economics.

Erdogan’s era of "orthodox" economics essentially got under way on November 7 after both the central bank governor and finance minister were replaced over one frantic weekend. Since then, all of Turkey’s rate-setting decision days have nonetheless been billed as capable of delivering surprises.

Orthodox has not proved predictable and, as no one takes what the Erdogan monetary officials signal about rate policy seriously anymore, the “front-loaded” hike could just as well have been implemented at the rates meeting held on February 18.

That's right. If it can't go up, it goes down.

Perhaps there is no-one left at the central bank capable of properly sizing up the type of global market shake-up that is now with us. In that case, an interim rate-setting meeting could have been held, instead of playing—and play they did—on February 24 with the reserve requirements and selling USD/TRY futures on the Borsa Istanbul derivatives market (VIOP) on February 26, after the fact.

If the thinking was that an emergency meeting would create a negative shock, then governor Agbal or Erdogan could have openly declared that the rate hike demanded by the markets would definitely be met on March 18.

Agbal might have at least convened the bank managers to inform them that the central bank would hike at the next rates meeting. This is actually what occurred at a meeting held on November 9, prior to the first “orthodox” rate-setting day that arrived on November 19. The option is neither ethical nor legal, but we will have the ethics and law classes after Turkey shows due deference to what’s taught in the introductory courses (and we’re obviously not just thinking of central banking here).

Having said all of that, let’s hang on to our reservations about any available courses of action as the upcoming period will be a clear test of whether the recent pressure that bore down on Turkey’s lira was caused by the global finance industry’s craving for volatility to make hay with or by Turkey’s policy rate. The industry is presently racketeering with EMs and Turkey has paid the price. We will soon see if the price is, for now, enough.

On the global front, the tensions seen between the Fed and the markets remain unsettled. The Fed and its Treasury branch, namely former Fed chair and current US Secretary of Treasury Janet Yellen, parrot the line that the money printing will continue in the foreseeable future, whatever the inflation rate turns out to be.

However, it seems that it is more profitable at the moment to not believe in the Fed.

US President Joe Biden’s $1.9 trillion stimulus package is now a past event that was already priced, while the chatter about upcoming tax hikes is not helpful in terms of relaxing the market. Let’s watch for when the tensions between the policymakers and the markets settle down ahead of a positive mode taking over.

As for Turkey, a country that is always an “outlier”, the central bank will release its next rates decision on April 15, at 14:00 local time.

Prior to that, on April 5, the official inflation rate for March will be published. The earliest chance the officials will have to make the case that inflation has taken to a declining path will come in May (according to market expectations and basic calculations based on the official data series), ceteris paribus and as long as Erdogan does not attempt to escape swallowing a bitter pill.

However, the market is currently pumping commodity prices while asking for higher official inflation rates and higher rates across the globe.

So, the current understanding between the finance industry and the Erdogan regime, which suggests that official inflation will find that downward path in May, may come into question before June 3, the date on which the May official inflation reading will be released.

Erdogan seems tamed at the moment, but don’t overlook how the time gaps between his U-turns have been getting shorter. 

Current market expectations suggest an end-2021 official inflation rate at more than 10% (the figure anticipated has lately been on the rise) while the central bank has a 9.4% target.

Away from the world of the pampered financial markets, let’s not lose sight of how higher policy rates will not put more food on the table for those in Turkey who rely on credit card debt to get by.

So, Erdogan, great man of the people and the great enemy, so he tells us, of high interest rates, now backs aggressive central bank tightening that inescapably will push more Turks into poverty and hunger. Any chance of him bowing to a call for a snap election may now be gone. Instead, the country would probably be well advised to brace for more crackdowns from the regime.

The Russian version of Erdogan, namely Vladimir Putin, has in the past likewise been praised for his “orthodox” choice when it comes to the governorship of Russia’s central bank.

However, the blonder and shorter Erdogan in Russia does not feel public pressure the way his counterpart in Turkey still does.

The original Erdogan would have an awful lot of explaining to do should there ever be any kind of proper examination of the way he has run the economy, nay, the country, in the past 18 years. There are crimes against humanity, don’t you know.

Nobody expects the finance industry to take up the cudgels as it takes its slice. However, there is still the Biden factor that is unresolved. We still don’t know what Joe Biden’s plans are for Turkey and the region. And Biden is yet to place a phone call to the occupant of the Ankara palace, a man he’s described as an “autocrat”, no punches pulled.

Biden’s just hit Russia’s ruble by not disagreeing with the description of Putin as “a killer” during an unscripted live interview on television. Do we have an emerging “warhorse” in the White House? That’s probably too much for all the Erdogan critics locked up in Turkey’s prisons to hope for, but there’s been no tangible sign of a Biden policy on Turkey as yet so it is only wise to consider the possibility that the lira could fall victim to, at the very least, a stray bullet from some public relations gunfire out of 1600 Pennsylvania Avenue.