Turkey Wants the Impossible: Lower Rates and a Stable Lira
(Bloomberg Opinion) -- Recep Tayyip Erdogan needs to decide what he wants from his top economic brass. Is it steep and persistent reductions in interest rates despite stratospheric inflation, or some degree of stability in the lira? It’s getting increasingly tough to have both.
Even by the standards of Turkish policy gymnastics, this week has been one for the books. The central bank intervened directly in markets for the first time in seven years to prop up the sagging lira. Erdogan then announced he is replacing his finance minister, prompting a renewed dip. The currency has lost a staggering 44% of its value against the dollar this year. (Argentina’s peso looks like sound investment by comparison, down a mere 17%.)
Turkey’s president can shake up personnel all he wants, but until the contradictions are resolved, not a lot will change. The big cause of the lira hemorrhage? Massive cuts in borrowing costs at a time when most countries are paring back stimulus and raising rates. Why is the central bank doing something almost guaranteed to erode the currency? Erdogan holds an unorthodox view that elevated inflation reflects higher interest rates, not the other way around. He wants borrowing costs down, down, down. Officials that go against the grain tend not to find it career enhancing: The country is on its fourth monetary chief since 2018. Seeing volatility after those cuts? Just buy lira and erode reserves.
If the president is sufficiently unimpressed with any of these things, he can just find people to blame and let them spend more time with their families. Lutfi Elvan will exit the finance ministry after a little more than 12 months as minister and will be succeeded by Nureddin Nebati, according to a late-night decree. Elvan opposed recent rate reductions, people familiar with the matter told Bloomberg News. You might think that makes current central bank head Sahap Kavcioglu sleep easy — until Erdogan decides that he doesn’t like a currency collapse.
The monetary authority’s surprise decision to sell dollars from its dwindling reserves shows policy makers are worried about the lira in freefall. Normally, support comes with one degree of separation, through state-backed lenders. The central bank wanted to show its hand. These are dangerous waters: The enormous sums spent on trying to prop-up the lira — some $165 billion starting in 2018 — have become a political controversy in the country.
The authority said it was concerned about “unhealthy price formations.” That sounds like language Japan used to employ to justify frequent intervention in prior decades. Then, officials in Tokyo would talk about “unnatural” moves in the yen, usually an appreciation they didn't like or perceived to be unfriendly to exporters. The ambition was often to smooth fluctuations rather than fundamentally alter the currency’s trajectory.
The goal of Turkey’s central bank matters. It’s often said that intervention is bound to fail and that bureaucrats can’t fight markets, more so the global foreign exchange market, where $6.6 trillion changes hands each day. But judging victory or loss depends on what you are setting out to achieve. If you just want to inject a bit of two-way risk and let traders know you’re there, then those objectives are achievable. But they’re just short-term. The efforts by many Asian central banks during the late 1990s financial crisis are a case in point. In the end, the result was often a friendly visit from the International Monetary Fund. If the idea is to single-handedly turn an extended rout into a prize-winning rally, forget it.
Some interventions have been successful. The key is usually size, underlying policy credibility and enlisting partners with enough firepower to get speculators to back off. Two instances come to mind: when the U.S. joined Japan in seeking to stem a rout in the yen in 1998 and the Group of Seven’s joint intervention in support of the euro. This isn’t where Turkey is now.
His attachment to low rates notwithstanding, Erdogan can change tack when he realizes that his approach has too many unpleasant consequences. In March, he dismissed governor Naci Agbal after he raised rates too high. Yet Erdogan appeared to endorse rate hikes — at least in the short term — when he appointed Agbal a few months earlier.
It’s not inconceivable that Turkey is on the cusp of another volte face, until Erdogan wants something different again. But unless vital tenets of policy are reconciled — interest rates and inflation — the country will struggle to dismount from a carousel of purges, cuts and crashes, followed by inevitable hikes in borrowing costs and still more staff shuffles. No wonder the lira is exhausted.
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Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.
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