Turkey’s Erdogan regime gave baffled markets a break on January 20, with the central bank announcing its monetary policy committee (MPC) had decided to keep the policy rate on hold at 14% in line with market expectations.

The move came after months of confounding the markets by unconventionally cutting the rate—by 500 bp since September—in the face of soaring inflation, with the central bankers bowing to President Recep Tayyip Erdogan’s declared “war for economic independence” and battle against apparent “global barons of finance” who he claims are attempting to derail Turkey.

On January 3, the country’s national statistical institute TUIK (or TurkStat) posted end-2021 official consumer price index (CPI) inflation at 36% y/y. In contrast, the Inflation Research Group, or ENAG, headed by Istanbul academics, calculated 83% y/y. Inflation in Turkey appears to be entering three-digit territory.

The MPC’s accompanying statement with its rates announcement offered little to go on, as per usual. The only indication on policy to be gleaned was the dropping of a previous reference that many on the markets took as a pledge to keep the benchmark rate on hold throughout Q1.

The reference, in MPC text published on December 16, stated: “The cumulative impact of the recent policy decisions will be monitored in the first quarter of 2022.”

On January 20, the MPC instead said: “While the cumulative impact of the recent policy decisions is being monitored…, the comprehensive review of the policy framework is being conducted with the aim of prioritising Turkish lira in all policy tools.”

So, perhaps we can assume that the benchmark will be kept on hold in February. That ‘hold mood’ might then last beyond the conclusion of Q1 at the end of March or another cut may be made in March.

The central bank, meanwhile, appears to have remembered that it is the owner of a currency. However, it remains a boxer that has his hands tied behind his back. It cannot use the interest rate tool (that tool now belongs to Erdogan). It will keep trying desperately to find indirect effective tools (for instance, a capital control that forces borrower companies to sign contracts stating that they will not buy FX), which turn out to be anything but effective tools at all. And it will keep burning through the reserves.

Erdogan and his henchmen are flogging everyone to death. Turkey’s monetary policy does not make any sense. In other words, monetary policy efficiency is in deep minus.

When it comes to the Turkish lira (TRY), there are no foreign investors to speak of anymore, while the policy rate has no impact on domestic interest rates. Since December 20, the regime has been tightening monetary conditions even though it has not hiked the policy rate.

After the pumping in of around 100bn of lira loans in both November and December, net lira creation fell to TRY7bn by January 17.

The Erdogan administration is not simply weak in the economics, it is also cold to the accounting. It is seizing 25% of export revenues.

However, Turkey’s trade balance is always in deficit and its external liabilities are heavy thanks to the “Erdogan economic miracle” that played out in the first decade of the century.

(You can also create such a miracle. Just sell everything you have, including the ring you have inherited from your father. Borrow as much as you can. Then invest everything in luxury consumption. Build a villa on a mountain. Buy a sports car. Travel to Ibiza. I personally guarantee that you will have a few “miracle” years.)

Getting back up to speed with the real world as it stands now, amid Turkey’s FX shortages, intermediary goods importers are weeping. And, do you see it? There is another tightening cycle working through here.

Back in the heart of Erdoganomics, despite all the fanfare, the month-old “FX-indexed TRY deposit scheme” is not too meaningful if you’re looking for impacts on the reserves. When FX-linked deposit holders convert to FX-guaranteed lira deposits, on paper they sell their FX to the central bank. But the FX-linked deposits are not real FX. There are more than $200bn of FX-linked deposits in the Turkish financial system but the overall FX-reserves (FX plus gold, the central bank plus the banking industry) remain at around $130bn.

Local banks supposedly shift their swap and required reserves to provide the required “FX” to the central bank, and this is to increase the net reserves while the gross reserves stay flat.

How much are we talking about?

The Turkish exporters' assembly states that exports amounted to $4bn in the week ending January 16. Let's say around $10-15bn in January to date. (It is unknown when the payments will arrive).

On January 19, Erdogan said that FX-guaranteed deposits amounted to TRY163bn.

Note how frivolity is the regime’s chief characteristic. There is no official data. Previously, the finance minister talked about 15% coming from FX-linked deposits.

So, around $2bn may have been added to the net reserves from the FX-indexed TRY deposit scheme. If you’re struggling to believe the president and his minister, you can hack the country’s banking system and count it up yourself.

Meanwhile, the central bank is throwing the excess amounts coming from the exporters on the fire, while there are also rumours about “unidentified” inflows. That’s the reason why the USD/TRY pair is again drawing a straight line below the 14-level.

The balance of payments also suggests high inflows via the net errors and omissions account. However, rumours in Turkey are more reliable than the official data. The data is also lagged (currently November is available).

Unreliable data creates many problems. Most probably, even the regime does not know what the real inflation rate is in Turkey.

And when the inflation figure is wrong, everything is wrong. For instance, the lira is not undervalued, it is still overvalued.

Net reserves excluding swaps “stabilised” at minus $56.7bn as of January 14 while the gross reserves, which include $29bn in non-tradable currencies ($16bn of Qatari riyal plus $6bn of Chinese yuan plus $8bn of IMF SDRs) as well as $38bn in gold and $4bn in banknotes (only $29bn is available on the financial system), stabilised at $109.8bn.

* Brut Rezerv: Gross Reserves (@atk_1881).

The central bank’s net FX position (net reserves minus the Treasury’s FX account at the central bank), by @e507. A ‘sharp’ recovery is drawing attention.

* KKM: Kur korumali mevduat, or FX-guaranteed deposit.

On January 29, the Fed will release the results of its next rates meeting. This year's new year rally is not packing much of a punch as the tightening mood is weighing on shoulders. The dollar index (DXY) only saw 94.63 on January 14 (a limited recovery from the 96s) while it is currently back in the 95s.

The Fed meeting could be used as a reason for ending the new year rally mood. If everyone expects a market shake-up from the Fed, the opposite happens, whatever the Fed says.

In February, the new year mood will definitely find its end. The teaser for the movie will be in theatres. May, August and November this year could bring blood red markets.

On February 3, TUIK will release Turkey's official inflation data for January.

On February 17, Turkey’s second rate-setting meeting of 2022 will be held.

Five-year credit default swaps (CDS) on Turkey have been hovering below the 600-level.

On Turkey’s foreign policy front, Erdogan is playing the good kid in line with Washington's demands. He will not be smashed between Russia and the US, even if Russia invades Ukraine.

A Russian invasion will not have a direct impact on Turkey. It will create only a limited speculative market fluctuation.

Domestically, the hunger gauge and social tension are high. Everyone awaits some violence from the regime. Erdogan keeps the taut political tension alive with menacing threats (such as threats to seize the opposition-run municipalities or close the pro-Kurdish HDP party).