Turkey’s New Banker Delivers Radical Medicine. He Had Little Choice

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In the annals of central banking, Turkey’s 475 basis-point hike in interest rates has the makings of a classic.

That Thursday’s move from new governor Naci Agbal matched economists’ forecasts does nothing to detract from its significance. Agbal’s opening shot ends, at least temporarily, a long sabbatical for the monetary authority, characterized by soaring inflation and a cratering currency. Policy makers have also been hamstrung by a convoluted rate structure and President Recep Tayyip Erdogan’s insistence that high interest rates cause, rather than quash, inflation.

It’s a splashy debut from Agbal, who took the reins after Erdogan fired his predecessor. It’s not every day in the pandemic era that you see a rate increase at all, let alone one this size. The benchmark rate climbed to 15% from 10.25%. Hopefully, it will go a substantial way toward convincing investors that Turkey is serious about getting a handle on inflation that’s in the double digits and shoring up a currency that’s among the world’s worst performers.

The language accompanying Thursday’s step was equally encouraging — if Agbal can follow through. “In the periods ahead, all factors affecting inflation will be taken into account, and the tightness of monetary policy will be decisively sustained until a permanent fall in inflation is achieved,” the Monetary Policy Committee said.

Anything less than a major ratcheting up of borrowing costs would have dealt a potentially fatal blow to Agbal’s credibility. That was especially so given that Erdogan appeared to back his new economic team at the central bank and finance ministry, where his son-in-law quit the day after Agbal was installed. A purge often precedes a shift in direction.

The drama of Thursday’s hike also lies in the contrast with other emerging markets, where historically loose policies have prevailed — without foreign-exchange carnage. Turkey sticks out like a sore thumb. In Asia, the dominant paradigm this year has been dwindling inflation and rate cuts. The terrain there resembles the U.S., Europe and Japan. Even Brazil, once a poster child for economic disappointment, has microscopic inflation and near invisible interest rates.

In South Korea, Indonesia, the Philippines and Thailand, the pace of price increases is at the lower end of central bank goals — or below the threshold. China is flirting with deflation, and Malaysia has been suffering from it for a while. A new dovish-leaning Monetary Policy Committee took up the reins at the Reserve Bank of India recently and is likely to resume trimming.

In Indonesia, the easing has been so pronounced that once-taboo debt monetization has been openly pursued. The Philippines adopted a subtler approach, buying smaller parcels of government bonds and balking at provocative labels. Hours before Turkey’s announcement, both nations’ central banks unveiled unexpected rate reductions, underscoring Ankara’s isolation.

But Turkey starts from a different place. Its EM-brethren on the Pacific Rim have been able to undertake this adventurism because inflation is beat, currencies have behaved and government leaders have largely refrained from stirring the pot. If you’re charting an activist course, message discipline is crucial. Agbal doesn't have such luxuries.

In the lead-up to Thursday’s move, Erdogan was portrayed as having given the new team latitude to prove their mettle. The president then appeared to pull the leash anew as central bank officials were preparing to hunker down for their meeting. “We shouldn’t let our investors get crushed by high interest,” Erdogan said on Wednesday. It was a warning of sorts.

I’m yet to encounter a leader or cabinet minister who loves higher borrowing costs. But Turkey’s new economic team is in a kind of grace period after the Nov. 7 reshuffle. Buyers returned to the lira last week precisely because they want professionals to do their job. Erdogan’s relative restraint gives investors a whiff of what might be possible. 

The president isn’t a hands-off guy by nature, so it makes sense for Agbal to go big in his honeymoon period. He may only get a few shots at this. Erdogan may have made a tactical move, in the name of economic survival, to give Agbal his head. By no means has he signed off on a series of rate increases, and certainly not successive moves of anything like today’s magnitude.

It’s premature to say Turkey is now on the correct path. Nevertheless, this hike-of-a-lifetime is an important start.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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.

©2020 Bloomberg L.P.

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