The Turkish central bank’s monetary policy committee (MPC) on May 25 held its benchmark rate at 8.50%, the authority said in a statement (chart).

Turkey’s central bank and its policy rate, however, remain idle on the sidelines. The Erdogan regime conducts its monetary policy via macroprudential measures and non-capital controls. 

Almost every day more macroprudential measures or non-capital controls, or amendments to already amended measures, are circulated by news services following briefings given by unnamed sources. Even the treasury departments at Turkey's banks can hardly keep up with each announced move.

On May 3, the Turkish Statistical Institute (TUIK, or TurkStat) said that Turkey’s official consumer price index (CPI) inflation was recorded at 44% y/y in April compared to 51% y/y in March.

On May 4, the central bank left its expectation for end-2023 official inflation unchanged at 22% (upper boundary: 27%).

The guidance was based on the assumption that the lira would not experience another crash. As of May 25, the USD/TRY rate in the interbank market was up by 2% to TRY 19.93 from 19.49 on May 4 while free market prices at the Grand Bazaar in Istanbul hovered in the 21s.

The lira has lately seen more record-breaking decline. The latest USD/TRY all-time record in the interbank market, set on May 23, stands at TRY 20.32.

Amid the booming lira supply and hard currency outflows via record trade deficits, officials only keep the lira from entering into a nosedive by coercing bankers into blocking and gumming up domestic FX demand. Also supportive are unidentified financial inflows and support from “friendly countries”.

Another lira calamity would come as no surprise. It could happen at any time. Turks have been building up cryptocurrency, cars and gold as assets to prepare themselves for an upcoming storm.

The FX-protected deposits scheme (KKM) introduced by the regime reached $121.5bn as of May 19. The KKM has a 23% share in total deposits while the FX-linked deposits’ share stands at 40%.

The central bank’s net FX reserves have, meanwhile, fallen into negative territory for the first time since 2002. Gross reserves declined by $25bn in the last two months to stand at $102bn as of May 19 while net reserves excluding swaps broke a fresh record with minus $60bn.

The central bank’s net FX position also stands at a fresh record of minus $76bn.

To break the FX demand, the government has lately allowed local banks to offer higher lira deposit rates. As of May 19, the weighted average lira deposit rate with maturities up to three months reached 30.47%.

On Sunday May 28, Turkey will hold its second-round presidential vote runoff, with incumbent Recep Tayyip Erdogan up against opposition unity candidate Kemal Kilicdaroglu.

Observers expect Erdogan to declare on the evening of May 28 that he has been re-elected. The so-called opposition in Turkey never challenges the election results, instead playing an active role to legitimise the officially presented outcome. The theatre of democracy in Turkey continues.

Though Turkey does have a habit for surprises, it currently seems that the Erdogan regime will still be in place on May 29.

In the period ahead, a currency devaluation looks a must due to the re-emerging side effects of the overvalued lira and the fact that the Erdogan regime will be in a position to find some FX supply. If the unidentified flows and the friendly country channels do not satisfy requirements, rate hikes could be on the cards.

On June 22, the MPC is set to hold its next rate-setting meeting.

The turbulence-free mood on the global markets, meanwhile, remains intact although the US government’s debt ceiling showdown between the Biden administration and the Republicans has not yet been overcome. So far, a “sell in May, go on holiday” market shake-up has not occurred.

Turkey’s five-year credit default swaps (CDS) have fallen below the 700-level, while the yield on the Turkish government’s 10-year eurobonds remains above the 10%-level.

On May 24, some unnamed sources told Bloomberg that Turkey’s central bank has asked some local lenders to buy the country’s dollar bonds to prevent a spike in CDS.