Turkey - more might mean less

Hakan Kara is obviously an excellent observer of the Turkish economy and policy. A really must follow person.

https://twitter.com/ali_hakan_kara/status/1681919631274000384?s=46&t=32_q5q9ehPzOjr0pU8ggAQ

He argues here that Gulf money bailouts will enable Erkan to move more slowly with rate hikes - so likely less delivered today. 

I actually could say the opposite in that I think the Gulf money comes with strings attached that the Erdogan administration has to introduce policy orthodoxy and that might mean higher policy rates sooner. 

We will find out today as the market is pretty split on whether we will see a moderate 100-200bps move or something more like 500bps as I expect to 20%.

Irrespective of the Gulf money, I think markets will take a smaller hike in policy rates poorly with the lira likely selling off hard as a result. And that will derail Erkan’s efforts to rebuild much depleted CBRT Fx reserves.

The market will assume that in delivering a smaller rate hike that Simsek and Erkan do not have a mandate from Erdogan to do whatever it takes to normalise policy and fight inflation.

A larger policy hike now would help I still confidence and sell the message that Gulf support is important not only for the $$ but for the policy backstop.

Going high and early would also give the CBRT a chance of ultimately getting away with a lower terminal rate. That could be 25-30%, but if it’s like watching paint dry with rate hikes all bets are off and we could see the lira totally de-anchor, which might mean that ultimately policy rates might need to go to 50% plus, maybe much much higher.