Central Banker to Step Out of Erdogan Shadow: Decision Day Guide


Turkey’s new central bank governor gets an early chance on Thursday to act boldly on his market-friendly messaging, buoyed by the apparent blessing of President Recep Tayyip Erdogan.

As Naci Agbal looks to turn the page on a period of stealth tightening of monetary policy, all analysts polled by Bloomberg predict an increase in the benchmark, with a median estimate for a hike of 475 basis points to 15%.

Some dissenters, including economists at Morgan Stanley, argue last week’s 10% rally in the lira means the central bank can get away with a smaller move. Yet most of the biggest global lenders predict the policy rate will be lifted to match the current effective funding rate.

Central Banker to Step Out of Erdogan Shadow: Decision Day Guide

Unlike his recent predecessors, Agbal -- appointed this month as part of a sweeping overhaul of Turkey’s economic decision makers -- can have more confidence that Erdogan has his back.

After long advocating an unorthodox theory that high interest rates cause rather than curb inflation, the president pledged to support his new economic managers with policies that will comfort investors following declines in the lira to record lows.

Still, a day before the decision Erdogan walked back some of his statements, renewing warnings of the burden that higher rates place on the economy.

Central Banker to Step Out of Erdogan Shadow: Decision Day Guide

Agbal inherited a complicated funding structure from his predecessor Murat Uysal, who relied on backdoor tightening using fringe tools.

His approach lifted the average cost of funding to 14.8% on Wednesday, from less than half that level in July. But even supported by state lenders’ unannounced interventions in foreign-exchange markets using central bank reserves, it failed to stem the lira’s collapse.

What Bloomberg Economics Says...

“A 475-bp hike may appear symbolically significant for the new leadership to gain the confidence of financial markets, but in reality it only lifts the effective policy rate by less than 75 bps.”

-- Ziad Daoud, chief emerging markets economist

For the full note, click here

With inflation in double digits for much of this year, the real interest rate was negative. The currency performed worst among emerging markets peers in 2020 up until Agbal’s appointment on Nov. 7 and the resignation soon after of the president’s son-in-law as economy minister.

Central Banker to Step Out of Erdogan Shadow: Decision Day Guide

Economists say Agbal may have to unpick the ineffective backdoor tightening if he wants to restore transparency and predictability at the regulator. Returning to a simplified policy would require raising the benchmark by around 450 basis points from 10.25%.

“We can expect a declaration of simplification by restoring the one-week repo rate as the only policy tool,” said Enver Erkan, an Istanbul-based economist at Tera Yatirim.

Erkan, who ranks second among forecasters of Turkish rate decisions in two years of Bloomberg surveys, expects the central bank to deliver a 550-basis-points increase, “which would appear to be drastic, but in reality tightens the effective rate by around 100 basis points.”

Central Banker to Step Out of Erdogan Shadow: Decision Day Guide

Shortly before he was sworn in with sweeping authority in 2018, Erdogan promised to seize control of monetary policy to implement his unorthodox views on interest rates and prices. Turkish markets were routinely hammered over the following two years.

Last week, with the lira way above 8 to the dollar, he changed tack, sparking optimism Turkey will allow interest rates to rise to offer a sufficient inflation-adjusted return.

“Like everywhere else around the world, in our country it is the central bank’s job to determine and implement policies needed to curb inflation,” Erdogan told lawmakers from his AK Party.

©2020 Bloomberg L.P.

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