It was another painful day for Turkish Lira longs.
Earlier today, in response to the broader USD strength overnight, the Turkish currency dropped to new record lows, sliding to 3.4214 and losing 10% of its value since the central bank’s last meeting in October, before the Turkey’s central bank unexpectedly raised its one-week repurchase and overnight lending rates for the first time in almost three years, prompted by the crashing lira’s impact on inflation, overriding Erdogan’s recurring demands for lower borrowing costs.
The bank raised the one-week repo and overnight lending rates by 50 and 25 basis points to 8% and 8.5% respectively while keeping the overnight borrowing rate at 7.25%, it said in a statement on Thursday. The move came as a surprise as only seven of 24 economists polled by Bloomberg predicted an increase of 25bps to the repo rate, while the majority said rates would be unchanged.
On one hand, raising rates may aid the bank’s sliding credibility after investor sentiment deteriorated after July’s attempted coup according to Sakir Turan of Odeabank. “The decision shows the central bank is serious about inflation outlook and has the capability to act,” Turan told Bloomberg by phone after the bank’s decision.
Oon the other hand, the decision may simply force Erdogan to scrap the central bank’s independence altogether and install more political overseers to do his bidding which for the past few months has been to push rates in Turkey lower. The central bank lowered the overnight lending rate for seven consecutive months from March amid political pressure on the bank to take steps to boost the economy, and President Recep Tayyip Erdogan said on Wednesday rates hadn’t been lowered enough.
As expected, the lira promptly surged after the decision, rising as much as 0.8 percent, if only briefly. The currency’s rapid depreciation required a tightening of monetary policy, the bank said in the statement. “Exchange rate movements due to recently heightened global uncertainty and volatility pose upside risks on the inflation outlook,” it said.
However, the market barely had time to respond to the surprising announcement, when an even more unexpected development took place in Europe, where the European Parliament voted overwhelmingly, 479 to 37 with 107 abstentions, to temporarily freeze talks on Turkey’s bid to join the European Union, citing deteriorating human rights and democratic standards under President Recep Tayyip Erdogan’s rule.
In the statement issued by the EP, it said that “MEPs want a temporary freeze on EU accession talks with Turkey. In a resolution voted on Thursday, they say Turkey should nonetheless remain “anchored” to the EU. They also pledge to review their position when the “disproportionate repressive measures” under the state of emergency in Turkey are lifted.”
“Turkey is an important partner of the EU”, say MEPs. “But in partnerships, the will to cooperate has to be two-sided (…) Turkey is not showing this political will as the government’s actions are further diverting Turkey from its European path”, they add.
A temporary halt of the negotiations would entail that no new negotiating chapters be opened and no new initiatives be taken in relation to Turkey’s EU Negotiation Framework.
The re-introduction of the capital punishment by the Turkish government would lead to a formal suspension of the accession process, say MEPs, pointing out that “the unequivocal rejection of the death penalty is an essential element of the Union acquis.”
MEPs strongly condemn the “disproportionate repressive measures” taken by the Turkish government since the failed coup attempt in July 2016. These “violate basic rights and freedoms protected by the Turkish Constitution” itself, they say.
The resolution was approved by 479 votes to 37, with 107 abstentions.
As the WSJ reports, the vote, which was nonbinding, underscores the deterioration in relations between the EU and Turkey and will further drain energy from accession talks that have already dragged on with limited progress for more than a decade. Erdogan had already dismissed the importance of the parliament’s vote, saying on Wednesday it had “no value” and accusing European governments of double standards given what he said were rights abuses and democratic shortcomings within the bloc.
Some senior EU officials have said they don’t favor cutting off the talks although they have also been clear that fresh moves in Turkey to undercut the rule-of-law or to readopt the death penalty could spell the end of negotiations.
In recent months, some senior European officials have warned it would be a diplomatic blunder to end the accession talks, saying it would cause a needless fresh crisis between Brussels and Ankara and blunt pressures for reform within Turkey.
However, others believe that ending the talks could allow the EU and Turkey to refocus ties on areas of real mutual interest and end the constant back-and-forth over Turkey’s record in moving closer to EU rules and standards.
While only one EU member state, Austria, has formally proposed that the membership talks should be suspended, in recent weeks there has been growing frustration with Mr. Erdogan in Brussels, Berlin and other capitals and an acknowledgment that membership negotiations were headed nowhere. Many EU countries have, from the start of talks in 2005, been deeply skeptical about Turkey joining the bloc. However, membership for Turkey was once pushed strongly by the likes of the U.K. and the U.S.
In recent months, Mr. Erdogan and Turkish officials have suggested they could walk away from the discussions. Ankara has worked to improve ties with Russia and Middle Eastern neighbors in that time.
Turkey balked in reaction to the vote, with the country’s EU minister saying Turkey “will turn a deaf ear, EP decision won’t even enter through Kap?kule border gate.”
— CNN Türk ENG (@CNNTURK_ENG) November 24, 2016
The vote comes a day after the EP also passed a non-binding vote to brand Russian media, notably RT and Sputnik, as “dangerous propaganda”, a vote which Russia has vowed will lead to “retaliation” if implemented.
It remains unclear if Turkey will proceed with releasing the nearly two million Syrian refugees allegedly contained within its borders as a result of the European Parliament vote. Erdogan has previously threatened that should Europe escalate its campaign against Turkey, he will retaliate by unleashing another wave of migrants in Europe’s direction.