GRAPHIC-Will Erdogan get more cuts? Four questions for Turkey’s central bank

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LONDON/ISTANBUL, Nov 17 (Businesshala) – Turkey’s central bank is expected to cut more interest rates on Thursday – a move that would please President Tayyip Erdogan, but analysts have warned that inflation could be higher and Could hasten Lira’s death.

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The currency faced a heavy sell-off on Thursday at 2 p.m. (1100 GMT) on hopes of the bank’s policy decision, falling more than 6% in November and crashing through the $10 watershed to a new record low here. Done.

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Here are four questions before the central bank, which has cut policy rates by 300 basis points since September:

1/ What will the central bank do?

Turkey is expected to cut its policy rate here by 100 basis points to 15%, according to a Businesshala poll.

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While inflation is at 2-1/2-year highs, analysts expect a lower-than-expected October reading to raise the possibility of a cut, though some caution the momentum of the lira’s recent decline may remain in the bank’s hands.

Erdogan’s unorthodox view is that lower rates will control inflation and ousted the last three central bank chiefs over a 20-month period due to policy disagreements.

Governor Sahap Kavioglu, appointed in March, ended months of sordid talk in September, when he laid the groundwork for easing. The central bank acknowledged last month that there was limited scope for further easing of monetary policy till the end of the year.

However, the recent cuts have undermined any remaining investors’ confidence in the independence of the bank.

Erdogan, who describes himself as an enemy of interest rates, is eyeing elections in mid-2023. With his popularity declining in opinion polls, the pragmatic president may reconsider his push for monetary stimulus – or refuse to back down despite the lira pain.

2/ How long can Turkey play this game?

Analysts say rate cuts are dangerous despite double-digit inflation and a falling currency.

“Unless we see a significant policy reversal in Turkey soon, the country is set to go into its third currency crisis since 2018,” said Eric Meyerson, a Stockholm-based senior economist at Handelsbankenen, specializing in Turkey.

Turkey has little ammunition to protect the currency as compared to previous years, here foreign exchange reserves are falling. Central bank reserves in Q2 covered imports in less than three months, down from 4.5 in 2019.

But Turkey may not be able to cut more, especially with central banks globally, including the US Federal Reserve, preparing to tighten policy to curb inflation.

“Going forward, we do not think the current policy mix is ​​sustainable and rates will eventually need to move higher,” Goldman Sachs analysts said. Second half of 2022.

Another risk is the large amount of short-term dollar-denominated debt that Turkey will have to repay.

3/ Where is inflation going?

Annual inflation here rose to 19.89% in October – four times the central bank’s target, though it argues that price pressures are temporary. Policy makers recently focused on core inflation, which stood at 16.83%.

Post-pandemic demand, supply chain disruptions and global pressure from an energy price rally added to the pressure on the weaker lira.

Producer prices rose 46.31% year-on-year in October, suggesting that inflation should persist for several more months. Deutsche Bank predicts that headline inflation will remain above 20% in the first half of next year and 16% by the end of 2022.

4/ What is Erdogan’s endgame?

Massive inflation and the falling lira have hit Turkish consumers hard, eating up earnings. This has irked Erdogan, whose conservative AK party has ruled for 19 years with a strong economy and a reputation for giving away household wealth.

Erdogan’s gamble is that a rate cut will boost the economy by supporting lending, exports and jobs. Economists say exports are unlikely to benefit from a weak currency due to high foreign debt of companies.

Reporting by Tommy Wilkes in London and Jonathan Spicer in Istanbul, Editing by Karin Strohecker and Richard Pullin

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