Turkiye -call me a Hakancı now

I have been in Turkiye the last few days and thinking thru next week’s CBRT rate decision. The Istanbul banking lobby has been pushing the 350bps cut narrative - they would, just looking at the 10.99% fee charged on my last cash point withdrawal in Turkiye. Nice business if you can get it. The irony of the focus on usury - when charging 10.99% to get your own money is somehow ok, like really? It gives banks and banking a bad name.

Note here that finance minister Simsek and CBRT governor Karahan were in London over the past week while the other MPC member Hatice Karahan also met investors I hear in Turkiye. The feedback from all those three interactions was relatively hawkish. I think they do much less than 350bps, maybe even less than 250bps, and here is why:

First, while the May and June inflation prints surprised on the downside, the July print is expected to remain elevated because of administrative price hikes. The year on year headline rate will still moderate but the MOM print will likely disappointing remain above 2%. That still shows disinflation is too slow. Services inflation remains sticky and there are still plenty of global inflation risk factors - tariffs. The CBRT would look stupid and would damage its credibility by cutting too aggressively in July only then to have to explain away a bad July inflation outturn reported in August.

Second, high rates and the risk of a resulting strong lira has been offset somewhat in recent weeks by the strong Euro - and a weight of Turkish exports go to Europe. The clammer from the Turkish export sector against high rates and a strong lira does not really match the evidence as exports are still holding up quite well. If anything the problem for the Turkish export sector is not a strong lira but productivity, incomes policy, the need to go up the value added chain, et al. Actually it feels like a period of more aggressive real appreciation would give another kick start to the disinflation.

Third, Simsek and the CBRT team would never say it but domestic and geopolitical flux has increased their own political capital and leverage to run a tougher more hawkish stance against inflation. The buffer of FX reserves, high rates and trust in the economic policy team provided a lifeline in difficult political times in March. This still holds given risks still around the CHP case, plus with an uncertain outcome in Syria, on the Kurdish issue, Iran, the war in Ukraine and tariffs. Erdogan is also signalling no early elections which gives Simsek et al more rope to knuckle down further in the fight against inflation this year - they can provide a step up/ahead of inflation now by surprising to the hawkish side in terms of rates. And therein they will further boost their credibility key still in beating down still sticky inflation expectations and inertia.

Growth is slowing but in my mind not enough to make a big difference on the inflation front - perhaps a shock is needed there to reset inflation expectations a step change lower. Growth might need to go from 2.5-3% to 1-2%. We are still far enough from elections to do that and provide electoral light at the end of the tunnel for Erdogan. You might argue with me there that with a population sceptical of Erdogan’s (or Bahceli’s) Kurdish peace process, Erdogan cannot afford still much lower growth. Elections though still seem 2-3 years off.

I am an avid follower of Hakan Kara, the former chief economist of the CBRT - call me a “Hakancı” - I think his argument that Turkiye still needs an additional credibility shock to make people believe that the fight against inflation is real/serious this time. He advises reinstatement of paragraph one of article 25 of the central bank law guaranteeing independence of the CBRT team and a new panel of expert advisers at TURKSTAT to boost the credibility of the inflation data. Cynics would say the constitutional ruling in favour of the original article of the central bank law is enough but Erdogan chooses to retain the revised version and hence option of firing and hiring numerous CBRT governors mid term. The TURKSTAT idea looks like a good one though.