Turkey’s rate-setters stick to 14% pause for seventh month despite 80% inflation

Turkey’s rate-setters stick to 14% pause for seventh month despite 80% inflation
By Akin Nazli in Belgrade July 21, 2022

The Turkish central bank’s monetary policy committee (MPC)  on July 21 left its policy rate unchanged at 14% (chart) despite inflation approaching an official 80% and the collapse of the Turkish lira, which shed 44% against the dollar last year and has lost another 25% this year.

In thrall to President Recep Tayyip Erdogan’s ‘Erdoganomics’, the central bank stuck with its rate pause under its unorthodox monetary policy for a seventh straight month. But the markets have gotten used to it. Turkey’s rate-setting meetings remain “no news” events.

At more than 65%, Turkey has the highest negative real interest rates in the world. Critics say Erdogan wants to fuel growth at all costs ahead of elections that must take place by June next year.

On July 4, the Turkish Statistical Institute (TUIK, or TurkStat) said that Turkey’s official consumer price index (CPIinflation amounted to 79% y/y in June, the highest rate in 24 years, following on from the 74% announced for May. Istanbul-based group of independent economists ENAG calculated that in reality inflation stood at 175% y/y.

The USD/TRY is currently testing the 17.70-level.

Turkey’s five-year credit default swaps (CDS) saw 908 on July 15. The yield on the Turkish government’s 10-year eurobonds remains above the 11% level.

Lira loan rates have risen over macroprudential measures and non-capital controls. The fresh loans flow is also slowing down, but the government is once more too late for the game.

The latest Turkish rates hold came on the same day the European Central Bank (ECB) raised interest rates for the first time in 11 years (At its rate-setting meeting, the ECB delivered a 50bp rate hike versus expectations of 25bp). On July 26, the Fed’s open market committee is expected to deliver another 75bp rate hike.

Economically, August will be a ‘hot’ month as per usual. The USD/TRY pair may crash again.

The EUR/USD fell to parity last week and Turkish exporters were grimacing again. Turkey buys inputs in USD and sells to the EU in EUR.

Turkey’s exporters simply produce a wider trade deficit. If exports were banned, Turkey’s trade deficit would fall.

Data

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