With Wall Street consensus expecting the Turkish central bank to hike its benchmark repo rate by 50bps (in two cases by as much as 75 bps and five analysts were expecting as much as a 100 bps increase) in hopes of arresting the recent record collapse in the Turkish Lira, this morning the central bank again proved it has become a political appendage of Erdogan, who has repeatedly stated he is against any rate hikes, when the central bank kept its overnight benchmark repo rate unchanged at 8%, even as it raised its less relevant overnight lending rate by the expected 75 basis points.
The latest breakdown of Turkey’s rates:
- Benchmark repo rate: 8%
- Overnight lending rate: 9.2%
- Overnight borrowing rate: 7.25%
The disappointment was particularly acute following a November decision to hike rates by 50 bps, the first such increase in more than two years.
As a result, the lira plunged nearly 2% with USD/TRY surging as much as 1.9% to session high of 3.8284.
In its justification, the central bank said that it can deliver further tightening if needed, noting “inflation expectations, pricing behavior and other factors affecting inflation will be closely monitored and, if needed, further monetary tightening will be delivered.”
“Moreover, necessary liquidity measures will be taken in case of unhealthy pricing behavior in the foreign exchange market that cannot be justified by economic fundamentals.”
“Recent data indicate partial recovery in economic activity, which is “expected to continue at a moderate pace. Yet, excessive fluctuations in exchange rates since the previous meeting have increased the upside risks regarding the inflation outlook”
It concluded that “significant rise in inflation is expected to continue in the short term due to lagged pass-through effects and the volatility in food prices.”
In other words, expect Turkish inflation to soar in the near future as the currency crash accelerates, all the while Erdogan blames some vast foreign conspiracy to overthrow him.
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