Investors stop second-guessing Erdoğan as he gambles with economy

Many of Turkey’s finance industry professionals have stopped guessing what President Recep Tayyip Erdoğan will do next after a series of highly unorthodox economic policy moves sent the lira spiralling downward and inflation soaring.

Last week, nearly half of 17 economists polled by local financial newswire Foreks declined to provide an estimate on what Turkey’s benchmark interest rate of 14 percent would be by the end of 2022. Forecasts ranged wildly from 9 percent to 22 percent. Ten of the 17 economists declined to predict when the central bank might revise interest rates next.

The International Monetary Fund, which last week called on emerging markets to prepare for monetary tightening by the U.S. Federal Reserve, is a leading advocate of predictability in economic policy, saying it boosts investor confidence and helps economies attract capital. It called on countries with high inflation to hike interest rates.

Erdoğan has confounded investors by ordering the central bank to cut interest rates in the face of accelerating inflation, a policy that jars with conventional economic thinking. The central bank has lowered rates to 14 percent from 17 percent over the past four months, during which time annual inflation has surged to 36.1 percent from 19.6 percent.

On Dec. 20, Erdoğan announced a dollar-linked bank deposit scheme to help halt losses for the lira against the dollar and to discourage Turks from saving in foreign currency – almost two-thirds of bank deposits are in foreign currency. The lira lost 44 percent of its value against the dollar last year as Turks sought to preserve their savings by buying dollars, hitting a record low of 18.32 per dollar last month.

The lira deposit scheme has so far attracted 131 billion liras ($9.7 billion), Treasury and Finance Minister Nureddin Nebati said on Friday. That is equal to just 2.4 percent of total banking deposits of 5.42 trillion liras, according to data published by the industry regulator. The government says 15 percent of the inflows may have come from accounts denominated in foreign currencies, an amount that would equal $1.45 billion of Turkey’s $260 billion of forex deposits.

After a sharp rally in the lira in the week leading up to Christmas, the currency has resumed its downward trajectory, losing 20 percent of its value since Dec. 24.

Some investors are now saying that the government, which is ruling out rate hikes, will enact further unorthodox measures to shore up the lira. Capital controls are a possibility, they say. Meanwhile, the central bank looks set to put economic growth ahead of the fight against inflation, risking further losses for the lira.

Consumer price inflation in Turkey could hit 55 percent by May, U.S. investment bank JPMorgan said this month.

The lira may weaken to 16.13 per dollar by the end of the year, according to the average estimate in a January central bank survey of financial market participants. The lira was trading at around 13.5 per dollar on Monday.

What investors seem sure of is that the central bank will pause its rate-cutting cycle for this month at least. Their predictions follow a statement by Nebati saying “we need to wait and see what happens in January, February and March”. Legally, Turkey’s central bank is supposed to operate independently of politicians.

Sixteen of the 17 economists surveyed by Foreks predicted no change in the benchmark interest rate this month, with one saying the bank would reduce rates to 12.75 percent. The bank’s monetary policymakers are due to decide on interest rates on Thursday.

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